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The return of politics

What’s at stake: The euro crisis has finally touched real politics. Although George Papandreou, Greece’s prime minister, has told parliamentarians from his centre-left Pasok party that there is “no need” to go ahead with a referendum on a bail-out because the main opposition now backs the deal, the tension between complex back-room deals and the democratic […]

By: Date: November 4, 2011 Topic: Macroeconomic policy

What’s at stake: The euro crisis has finally touched real politics. Although George Papandreou, Greece’s prime minister, has told parliamentarians from his centre-left Pasok party that there is “no need” to go ahead with a referendum on a bail-out because the main opposition now backs the deal, the tension between complex back-room deals and the democratic imperative has certainly reached this week a point of no return.  

An inevitable outcome

Jean-Paul Fitoussi says that Mr. Papandreou’s decision to press for a popular referendum on the bailout was the inevitable result of Greece’s loss of sovereignty to Brussels and the International Monetary Fund. It’s as if the Europeans — or Merkel and Sarkozy alone — believed that they were in control of the people of Greece. But this is a democracy. In Greece, and even in Italy, you cannot expect to rule without the support and consent of the people. And you can’t impose an austerity program for a decade on a country, and even choose for them the austerity measures that country must implement.

Shahin Vallee and Guntram Wolff
argue that the eruption of politics in what was seen by the Europeans as a fairly technocratic process was bound to happen sooner or later. European democracies cannot be expected to make fundamental choices without the full legitimate backing of their own people. In this respect, the call of the Greek Prime Minister to seek legitimacy for its actions could be a blessing in disguise. In other countries, including in particular in Germany, leaders have sought broad political support of the support measures despite heavy criticism. Ultimately, what PM Papandreou has called is much more than a Greek referendum. It is a moment of truth for the euro area and for the European Union as a whole.

Buttonwood
draws a parallel with the political constraints that made the return to the Gold Standard impossible after the first world war. At one level, the idea of "voting away your debts" seems rather odd. But voters have every right to do so, as long as they accept the consequences. In his book "Golden Fetters", Barry Eichengreen argued that one reason the gold standard failed to work after the first world war was that most states had become democracies; regular doses of austerity were needed to ensure sound money. But that was politically impossible once the working classes had the vote, especially as politicians were worried about the threat of communist revolution.

Fear the people

The Economist writes that the markets are not the euro’s only threat. Voters may be too. One way or another, the euro is destined for an unavoidable test of popular support. Unless the euro zone’s leaders shape up, this is an encounter their currency may well lose. Mr Papandreou has created an almighty mess, but he is better cast as the messenger than the villain. Until now the euro crisis has chiefly been about pressure from the markets. But a country’s finances are not defined by markets alone. Rather the limits of solvency are tested by people’s willingness to accept tax rises and spending cuts. A government runs out of political capital long before it runs out of things to tax. In the end, won’t pay matters more than can’t pay. Throughout this crisis, creditors—particularly Germany—have worried about being too soft on the euro zone’s weaklings, for fear that they would go slow on reform. Mr Papandreou has shown that they also need to worry about being too austere.

Tim Duy
hesitates to think this story is over as it is never easy to put the democracy genie back inside the bottle. Greece Prime Minister George Papandreou backtracked on his calls for referendum, much to the relief of market participants. But the citizens of Greece might not react calmly to having democracy snatched back out of hand’s reach.

Charles Goodhart
suggests strengthening the link between citizens and European institutions, by instituting a direct vote for the Presidency of the European Commission to give a real taxing authority to the EU. While approving to most of his points, Ted Truman criticizes the timidity of some propositions, in particular relative to macroeconomic imbalances and to the financial system, but agrees that a closer union is necessary.

The EZ war cabinet

Eurointelligence reports a Financial Times Deutschland article emphasizing that since the ad hoc meeting of a select group of euro leaders at the margins of the farewell ceremony for Jean-Claude Trichet in Frankfurt a sort of eurozone war cabinet has emerged as the currency union’s real power center. That evening in Frankfurt Angela Merkel, Nicolas Sarkozy, Jean-Claude Trichet and Mario Draghi, Christine Lagarde, Herman Van Rompuy, José Manuel Barroso and Jean-Claude Juncker sat down for a non-scheduled crisis meeting prior to the two emergency summits. Since then this group has met repeatedly, the last time last night in Cannes. Compared to the euro heads of finance ministers it has the advantage of being small, informal while yet comprising the most powerful actors (Merkel, Sarkozy, Draghi, Lagarde) while associating the institutions and the smaller euro states (Van Rompuy, Barroso, Juncker).

Jean Quatremer
argues that in the urgency of the sovereign debt crisis, the Seventeen have come up with an "economic government". But it is in reality a Franco-German directoire who imposes more and more sharply its views to its partners under the principle of "paymaster-decision maker." The decisions taken by the Merkel-Sarkozy couple, and endorsed by the European Council of Heads of State and Government of the euro area, touch now with the economic and fiscal policies. Problem: this interference in national budgets is outside any democratic process. Especially as the Community institutions (Commission and, especially, Parliament) as well as national parliaments are kept out.

Guide to Greek politics

The FT EZ crisis live blog summarizes of how events unfolded in Athens before the drop of the referendum plan. Evangelos Venizelos, the Greek finance minister, puts the first cat among the pigeons by saying he is no fan of the referendum idea. It then appears that George Papandreou is about to resign as PM. But he doesn’t and summons his ministers. Scared by what might happen if the referendum goes ahead and Greeks vote against the bail-out or in favour of leaving the eurozone, the opposition conservatives reverse their opposition to the bail-out. This gives Papandreou the “consensus” he has been seeking, meaning he can drop the referendum plan. He does not resign.

Real Time Brussels
provides a guide to Greek politics although it’s possible that you already know more than you ever thought you’d learn, or cared to learn. Several PASOK MPs, including heavyweight Vasso Papandreou (no relation to prime minister), have in the last few days asked for the formation of such a miracle-government that will oversee the approval of the new bailout deal and maintain some form of stability in the country until the next election. It is important to note here that Greece has exactly zero experience and tradition in consensual politics, let alone in coalition building. In an electoral system that is built to perpetuate strict bipartisanship, and in a country where the divide between left and right runs deep and the rhetoric makes it sound like it runs even deeper, only once in recent history has such a government been formed.

A technocratic solution

Megan Greene reports that there are also rumors that Lucas Papademos, a former ECB vice president, has been tapped to lead an interim government. Mr Papademos was asked to fill the role of finance minister last June when prime minister Papandreou reshuffled his cabinet and resolutely turned the role down, presumably because he considered taking the role akin to political suicide. But she remains unconvinced that he will agree to lead an interim government that is tasked with implementing the terms of a bailout programme that is doomed to fail.

Atrios
argues that it’s time to do away with the term "technocratic." It creates a category of policies, which are The Right Thing To Do, yet the rightness of the policies aren’t tested against anything. They aren’t tested against democracy (messy pesky voters!) or results (the
economy sucks). But merely say the word and we’ve conjured up images of very sensible highly educated wonky people doing the right thing, even as they destroy the world. All of that technocratic management has achieved wonders and now messy politics is daring to intrude. Technocrats are doing their best to destroy the world. Intervene, politics, intervene!

Paul Krugman
writes that Atrios is right but it’s actually more than that: these alleged technocrats have in fact systematically ignored both textbook macroeconomics and the lessons of historyin favor of fantasies. The European Central Bank has placed its faith in the confidence fairy, while imagining that it can run policy in a way that has never worked in several centuries of central bank experience (see Brad DeLong’s take on the ECB’s battle against central banking). Meanwhile, the European policy elite has simply wished away the clear evidence that the euro zone needs to make an adjustment that is virtually impossible unless inflation targets are raised.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


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