At the highly anticipated December summit of European leaders in Brussels, German Chancellor Angela Merkel and Sarkozy failed to overcome fierce opposition from British Prime Minister David Cameron, who decided to veto the proposed treaty changes, essentially removing Britain from the constraints of enhanced European governance. With Britain providing a demonstration effect, four other EU countries expressed discomfort in the week following the summit.
This was the catalyst for the third 2011 morphing of the European crisis. Europe now found itself facing an even bigger problem -- namely, a crisis of the 27-member EU as a whole. Questions multiplied as to the stability and ultimate viability of a multispeed EU.
These three distinct morphings have surprised many. They should not have. After all, the underlying dynamics are not that different from what many emerging economies have experienced in the past. Economists describe this as "path dependency." It is a process of "multiple equilibria" in which each successive outcome takes you even further away from the initial starting point.
While familiar to emerging economies, these dynamics are very different from what Western countries are used to. Specifically, for the West, it is no longer about economic cycles that involve temporary and reversible deviations from a familiar anchoring mean. It becomes a secular phenomenon that -- in a fundamental manner -- speaks to structural changes, institutional mishaps, and a whole series of the unthinkable becoming facts. In the process, policy measures lose effectiveness, consumer sentiment is disrupted, and healthy balance sheets retreat to the sidelines, thereby increasing volatility and accelerating deleveraging.
This is an unfamiliar world whose complexity increases exponentially as policymakers fall further behind the accelerating path-dependency dynamics. The engineering of a rescue becomes considerably more difficult and the politics even more intricate. That's not even counting the implementation difficulties that inevitably accompany hard policy choices.
Structural challenges require structural solutions that, usually, involve a component of immediate sacrifice for the promise of welfare enhancements down the road. This tradeoff, between short-term costs and long-term benefits, is not one that comes easily to political systems heavily influenced by the election calendar.
Long-standing social compacts are threatened for a citizenry that is already angry with what has transpired. In some cases, such as Greece, this can lead to wide-scale protests, violence, and paralyzing general strikes. Turnovers in government become the rule -- it should come as no surprise that there have been so many changes in Europe already, including two countries (Greece and Italy) that have opted for unelected "technocratic governments."
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