Why Slovakia Is Still a Big Problem for the Euro Zone

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So after creating a giant kerfuffle on Tuesday by voting down much-needed measures to expand the powers of the euro zone’s $1 trillion bailout fund, Slovakia’s parliament reversed course and voted for those very same reforms a mere two days later. That means the euro zone can now use the European Financial Stability Facility (or EFSF) to buy up sovereign bonds and recapitalize banks – reforms seen as crucial tools to combat the contagion rampaging through Europe.

So all is happy in euro land, right? Not really. Yes, the snafu in Slovakia ended positively for the euro. But the way it played out showed what might be the most dangerous flaw in the entire monetary union.

That flaw is the way domestic politics can hold necessary euro zone reforms hostage. Because the parliaments of all 17 euro members have to approve any major crisis-fighting decision, such as this expansion of EFSF powers or the second Greek bailout, politicians in every euro zone capital can use euro zone policy to settle domestic political scores, achieve political goals, or pander to local voters. That seems to be what happened in Slovakia. The EFSF measure passed on a second vote because the main opposition party, Smer-Social Democracy, switched sides and voted in favor. And it just so happens that in return, the party got an agreement from the outgoing coalition government for early elections – elections the Smer could very well win. So from where I sit, it looks like the Smer played this perfectly – capitalizing on a split in the ruling coalition over euro zone bailout policies to extract a political win.

We’ve seen domestic political squabbles or concerns impact the euro zone debt crisis again and again. Last year, the Portuguese government fell after it failed to get an austerity package through parliament, leading to the country’s bailout, even though it was obvious that any government that came to power would have to implement the same sort of austerity measures. The government in Finland has been complicating the second Greek bailout due to the demands of one political party for collateral for further rescue loans for Athens. We even saw German Chancellor Angela Merkel face off against a revolt within her own coalition against the same expanded EFSF powers that created the political crisis in Slovakia.

This problem isn’t going away – in fact, it could intensify. With euro bailouts becoming more toxic with voters in many parts of the zone, there is little incentive for opposition parties or even minority members of coalition administrations to support them. Why not score a few political points at the euro’s expense and force your opponents to back unpopular policies? And with euro zone leaders expected to hammer out another big package of measures this month – steps that will likely demand even greater sacrifices for euro zone members – the process of combating the debt crisis will face political test after political test in parliament after parliament, with each vote influenced by local concerns that have little to do with the monetary union’s woes.

Unless there is a massive change in the governance of the euro zone, one that strips its individual members of power or forces some sort of majority rule, there is no effective solution to this political problem. It is simply built into the euro. So expect more Slovakia scares in the future. Will the next one work out as well? Or the one after that?

– With reporting by Katerina Santurova / Prague

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