The title of this post may make some of you suspect that I’m smoking something. How can I think genteel Europe could see public upheaval massive enough to overthrow long-entrenched, democratic regimes, in the way Arab countries have witnessed popular movements upset the political order? Well, maybe the Europeans aren’t ready to storm the Bastille, so to speak, but more and more of them are in revolt against the euro zone, or more specifically, the policies imposed in a (so far fruitless) attempt to quell its debt crisis. That dissent is taking place at the highest levels of the euro zone’s leadership as well. The consequences of this growing resentment and disagreement could be dire – they are making the debt crisis harder to fix, heightening the cost of resolving it, and increasing the chances that eventually members of the monetary union will decide their fortunes would be better without the euro. Here’s what I mean:
Since the beginning of the euro zone debt crisis 18 months ago, there has never been anything close to consensus within Europe’s capitals over what to do about it. The dissension began over whether or not to bail out Greece, and has since continued over how to finally squelch the contagion that spread to other weak euro zone economies. Some, like Luxembourg’s outspoken Prime Minister, Jean-Claude Juncker, have advocated for steps that would integrate the zone further; others, such as German Chancellor Angela Merkel, have resisted taking on more responsibility for their euro zone partners and have hoisted the burden onto the struggling, debt-heavy nations themselves. The divisions have made Europe’s response to the crisis tepid and insufficient, a perpetual case of too little, too late.
Now the divisions over policy are deepening and hardening. There is a full-on, heavyweight slugfest going on over how to handle Greece’s debt. Some officials have floated the idea of some sort of “reprofiling” (aka, restructuring) of Greek debt, in which maturities on government bonds would be extended, giving Athens more time to reform. But the European Central Bank assaulted the idea, with one member of its governing council calling it a “horror scenario.” Germany, at one point thought to be supportive of a restructuring, has joined in the attack. The German finance minister warned that “the consequences could be more catastrophic than those after the collapse of Lehman Brothers” if Greece became insolvent. They have a point. A Greek debt restructuring would inflict losses on bondholders (such as European banks) and likely fuel further contagion to Spain, Italy and other indebted euro zone sovereigns. Moody’s warned this week that any kind of debt restructuring for Greece would impact credit ratings across the zone. But without a restructuring, the euro zone’s richer countries (like Germany) may be forced to continually write check after check to fund Greece’s unsustainable debt load. So where is that leading us?
To the second emerging problem: Some euro zone politicians are in near-revolt over debt-crisis policies, especially in those doing the bailing out. Opposition to continued bailouts appears to be rising, and as a result, donor governments are shoving an ever-heavier reform burden onto their weak neighbors. Finland backed the recent rescue package for Portugal only with strict conditions, including a demand that the government in Lisbon convince private bondholders to maintain their exposure to Portuguese sovereign debt. There is also talk that a council might be set up by euro zone countries to oversee Greece’s privatization program. As the rich take a tougher and tougher stand on the poor, the euro zone is only increasing the risks that bailed-out government will revolt against current policies.
And so will its citizens. We’re witnessing a clear trend in which the regular folks of Europe are growing more and more displeased with euro zone policies. Giant protests in unemployment-ridden Spain are the best indication of the building level of frustration. Voters are also taking out their anger on those politicians inflicting euro-zone policies. The ruling Socialists in Spain, who have actually done a pretty good job pushing through tough – but unpopular – reforms, got smacked in local elections this month. That’s after the party in Ireland that signed on to an EU bailout lost power in February elections. So what we’re seeing is that any politician who adheres to euro zone debt-crisis policies is cutting short his career.
So where is all this headed? The big mistake made by the decision makers in Berlin, Brussels and the other power centers of Europe is that they assumed that the politicians and voters in democratic systems would willingly swallow the poison they’re dishing out. But that may not be the case. As long as the EU’s approach to the debt crisis (1) imposes the full burden of adjustment onto the weakest euro zone economies while (2) protecting creditors with (3) increasingly intrusive demands, the level of division and dissension within the zone will rise. I’m concerned that the euro zone’s current bailout strategy is simply becoming socially and politically unsustainable.
Maybe that won’t lead to a true Arab spring, with street battles and toppling regimes. But the debt crisis, and Europe’s response to it, is becoming a primary determining factor in the political fortunes of governments across the region. And as public frustration and anger build, can the current course be maintained? I think not.