European Affairs

The Eurozone Economic Crisis Starting To Face More Severe Political Tests     Print Email

European leaders have often proved nimble in coping with the euro strains when they have been pushed to the wall by crises in individual member states, devising bail-outs and launching austerity programs designed to reassure global bond markets that the fiscal tensions can be controlled.
But in recent parliamentary and popular protests against these economic remedies have started to pose a political threat to the eurozone’s ability to deliver on its leaders promises.

These new political tensions provide an additional layer of uncertainty as a backdrop as European leaders meet on December 16 and 17 to discuss creating a permanent rescue fund for the eurozone – a larger fund, with more stringent conditions, that could replace the current European Financial Stability Facility, which expires in two years.

The lead actor in this episode is Germany, backed by France, in seeking to impose tougher overall discipline on the eurozone. In this bid, Chancellor Angela Merkel has to contend with many challenges in her own country, including voters’ dislike of any larger commitments to more profligate European economies and the risk that Germany’s powerful  constitutional court (which enjoys authority comparable to that of the U.S. Supreme Court) may strike down some of her commitments to the EU as unconstitutional  under German law.

But any stronger new European approach will have to win assent from the member states and from the newly-powerful European Parliament, and these players may be more vulnerable to the political backlash that has been held in check until now but could now be gathering steam across Europe. 

The tensions are apparent in every country that is on the “endangered” list, including Portugal, Ireland, Italy, Greece, Spain, Belgium and Austria. If one of these governments starts to tumble, the domino effect could cause crises in several and face the EU with a “bail-out” problem too big to manage in the ways that have worked until now.

In Italy this week, Prime Minister Silvio Berlusconi managed to survive a parliamentary vote of no confidence and thus preserve the credibility of the Italian government’s plan to gradually put its fiscal house in order. But his margin of only three votes in the lower house (of 600 members) is bound to leave open the possibility of another attack from his rivals (including a dissident faction of his own party) and possibly early new national elections – a development that would aggravate the bond markets’ doubts about Italy’s stability amid Europe’s economic turmoil. An outburst of street riots in Rome after the vote may prove an isolated incident, but all European governments are worried about the risks of escalating violence in the protest movements that have surfaced in many countries,  even in Britain – which has imposed a draconian budget crackdown despite the fact that the nation is not part of the eurozone.

The threat of political failures that could derail economic plans to stabilize the euro come on two levels.  One is the risk of popular protests that could lead to crippling strikes. The second – and perhaps more realistic one – is that voters will turn out governments that have imposed tough reforms and replace them with new governments ready to disown their predecessors’ discipline.

In Ireland, for example, the country has reacted grimly but calmly to the imposition of hard times, but the ruling Fianna Fail party has suffered its steepest-ever fall in popularity – dropping below the center-left Labour party for the first-time ever in polls. And Irish public opinion favors early general elections, whose outcome could call into question that current national and international conditions sustaining Ireland’s debt position.

For the moment, the general outlook seems brighter about containing popular protests, anti-austerity demonstrations and strikes. In the most dramatic confrontation so far, France’s President Nicolas Sarkozy prevailed against a massive protest movement that lasted for weeks before union leaders wound down fuel-blockages and other strikes against an increase in the retirement age. That French example may carry weight with other countries as a sign that Europeans in general recognize the need for belt-tightening and will not take to the streets against what they see as inevitable. In Portugal, a one-day strike last month did not escalate. Spain, even amid sky-rocketing youth unemployment, has managed to avoid dire protests. In Greece, the country which has witnessed the most violent demonstrations, popular support for protest drained away after three people were killed in the street clashes. 

But even if a precarious calm prevails “in the street” across Europe, political tensions seem to be rising as the economic pressures tighten and uncertainties cloud the outlook. These pressures, often fueled with an undercurrent of anti-immigrant and ethnic hostilities, weigh on international markets’ confidence in the ability of European leaders, especially those in the eurozone countries, to adopt and impose bold collective plans that will stabilize the euro.

The even-larger political threat these days come from fresh doubts about more governments' ability to pursue sustained drives to regain fiscal credibility.  In this regard, Belgium has suddenly come into the spotlight this week, with a credit-agency warning that the country’s AA+ credit rating is likely to fall. “Prolonged political uncertainty could hurt Belgium’s credit standing,” the agency said.

Belgium has not had a government for six months because of apparently unbridgeable ethnic rivalries. The country needs to sort out its deficit, yet without a functional government there is no way it can. Investors fear that with such weak leadership, Belgium will not be able to put together austerity measures tough enough to solve its problems.

Despite this long list of potential political problems, there is no single one that seems likely to occur in a way that sends shock waves through the entire eurozone. The real (and unquantifiable) problem is the risk that at some point the political uncertainties become almost a self-fulfilling prophecy by raising economic doubts in the global market and thus ratcheting up political pressures to an unsustainable point.  In other words, the political doubts about governments’ credibility create the exact conditions (fears of fiscal irresponsibility) that started investors worrying in the first place.

It is a threat that European leaders must have in mind as they look for a bolder common plan and fresh means of action to underpin their collective determination and ability to sustain the euro and the single currency.

-- European Affairs
 
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