Can tiny Slovakia doom the euro?

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Slovak Prime Minister Iveta Radicova (L) and political leaders gives press briefing after a parliamentary session on the eurozone's rescue fund on October 11, 2011 in Bratislava (Samuel Kubani / AFP / Getty Images)

If the recent Dexia bank collapse showed the fragility of the euro zone’s financial system, then the shocking collapse of Slovakia’s government on Tuesday shows the fragility of its political system. Slovakia’s parliament unexpectedly voted against a decision reached by euro zone leaders in July to expand the powers of its $1 trillion bailout fund, a step seen by investors as crucial for combating the escalating European debt crisis. The coalition administration of Prime Minister Iveta Radicova subsequently fell. Without Slovakia’s approval, the entire euro zone plan to enhance its rescue fund – by allowing it to buy sovereign bonds and recapitalize banks – will be stymied, perhaps entirely killed off.

The breakdown in Bratislava is a sign of the growing constraints Europe’s leaders face in taking steps to combat the euro debt crisis, and the faults built into the structure of euro zone that make it so difficult to take the rapid-fire action necessary to ensure the monetary union’s stability. The events in Slovakia could intensify the debt crisis, put greater strain on its beleaguered governments and enfeebled banking system, and create even more market turmoil. It also raises much greater doubts about the ability of euro zone governments to undertake the more comprehensive measures necessary to finally quell the debt crisis and resolve the biggest current threat to the global economy.

The reason the disaster in Slovakia came as such a shock is that the country had been considered a staunch supporter of the euro and the efforts to save it. While anti-euro sentiment has been on the rise in Finland, Germany and elsewhere, no one expected Slovakia to be the euro zone’s weak political link. So the political crisis in Bratislava shows how opposition to bailouts and the rising costs of keeping the monetary union intact is spreading and becoming more dangerous and unpredictable. Richard Sulik of the Freedom and Solidarity party led the charge against the reform of the bailout fund, which is formally called the European Financial Stability Facility (or EFSF), arguing that it would place a financial burden on Slovakia:

I’d rather be a pariah in Brussels than have to feel ashamed before my children, who would be deeper in debt should I back raising the volume of funding in the EFSF bail-out mechanism.

There is still widespread hope in the euro zone that the rescue-fund reform will eventually pass through Slovakia’s parliament, maybe later this week. Party bosses there are actively working towards ramming it through. Even if Slovakia ends up giving the thumbs up, though, the political problems there raise serious questions about the euro zone’s future efforts to fight the debt crisis. German Chancellor Angela Merkel and French President Nicolas Sarkozy are pressing for an agreement on a new, even wider package of measures to recapitalize banks, solve the Greek debt crisis and increase euro-zone integration over the next two weeks. If the euro zone can’t get approval of a narrower measure announced months ago, what chances does the union have of asking its members for even more costly sacrifices?

And most of all, the trouble with Slovakia shows the very weaknesses of the entire monetary union itself. There is no simple mechanism for implementing euro zone decisions, even in the face of a serious crisis like the one boiling in Europe today. The leaders of the euro zone can announce their policies, but nothing can happen until the parliaments of all 17 members give the OK. That means that domestic political issues in any one member can derail policy for the entire zone. Demands by Finland for collateral in return for a second Greek bailout, for instance, have held up the process of finalizing that agreement, a situation that has roiled global markets. Now tiny Slovakia could scuttle another euro zone plan.

So Slovakia proves once again that the euro can only be as strong as its weakest link – whether economic (Greece) or political. And at the same time, the case shows the difficulties of achieving the sort of political integration that may be necessary to ensure the euro’s survival. Even if Slovakia eventually resolves the mess it has created, the country has given the world yet another reason to worry about the future of Europe’s grand monetary union.