It's the Politics, Stupid

The eurozone crisis isn't about debt or deficits -- it's about a dysfunctional political system.

BY KATHLEEN R. MCNAMARA | DECEMBER 16, 2011

While last week's agreement was framed by Merkel and French President Nicolas Sarkozy as the basis for a fiscal union, the system established bears no resemblance to any functioning fiscal union in history. Governing solely by rules and sanctions, imagining that national polities will somehow adhere to the goals of keeping public debt at 60 percent of GDP and budget deficits at 3 percent of GDP is fundamentally at odds with everything we know about how politics work in real life and smacks of magical thinking. The agreement is a rewarmed version of the existing Stability and Growth Pact (SGP), based on guidelines set down two decades ago when European leaders decided to move forward with the euro.

Let's recall that Germany and France both eventually violated the SGP (as they should have) when their economies needed a boost. Romano Prodi famously called the pact "stupid" when he was president of the European Commission, and economic theory has never found a rationale for the specific target numbers. What's needed is not the automatic application of mindless rules meant to be broken, but rather the discretion to decide what is right in any given situation, determined collectively by democratically elected EU leaders within the governance institutions of a real fiscal union.

Single currencies have historically been forged in war as part of larger state-building projects that wrestled power to the center through taxing, spending, and debt instruments grasped by leaders in search of the tools to survive in the face of military conflict. The European Union has been an exception, but its time may be up. As politically difficult as it may be for Merkel to recognize the need to pool sovereignty by agreeing to a Eurobond and true fiscal union, it is myopic at best for her to destroy the considerable economic and political benefits that Germany has gleaned from the euro and the broader EU project. If austerity and nonsensical rules on deficits and debts in a faux fiscal union are the only way forward for the eurozone, we should all prepare for its demise.

JOHANNES EISELE/AFP/Getty Images

 SUBJECTS: ECONOMICS, EUROPE
 

Kathleen R. McNamara is an associate professor of government and foreign service and the director of the Mortara Center for International Studies at Georgetown University.

HAMLET

8:33 AM ET

December 16, 2011

Dont know what will happen

Politicians are making something which looks like they are stupid and now they are putting us and this world in a hell as every thing with economy is going down.

 

DOMINOES

11:22 AM ET

January 4, 2012

totally agree

This is not at all about the debt, the debt is just a symptom of a deeper problem that is the entire political of the EU. This system was doomed for failure, but not after there was a little bit of success. I miss the old days of Europe when there was less chaos and drama...seems like they need to know how to use a scientific calculator more than anything else to get this debt and political system figured out.

 

YARINSIZ

12:40 PM ET

January 10, 2012

The governments pursue

The governments pursue austerity that deprives countries of capital for small business loans, so jobs with workers and paychecks who become customers and taxpayers are not created in the required numbers. The EU worships "free enterprise" and won't modify it enough to solve the crisis, so the EU is headed for a 10 year depression seslichat that will drag the US with it. The Chinese have invested in EU companies, but the EU refuses to learn. Dagong downgraded Italy and France on 12-7 and 12-8, Moody's cut ratings on 3 French banks on 12-9, and Fitch cut 3 US and 4 EU banks today. Investors have asked me about hedge funds that bet against the EU, but I tell them to invest in China and Australia, instead.