Politics moving to foreground of euro crisis

WORLD VIEW:DOMESTIC, TOP-DOWN and bottom-up European politics are intersecting to determine the outcome of the euro zone crisis before the end of this year. These three dimensions must all be taken into account in judging whether the single currency will survive.

Systemically this is an economic crisis of banking, refinancing and institutional deficits. But that it will be resolved politically is often underestimated in economic comment. The systemic problems faced by the euro may prove irresolvable, so that it will fragment or collapse. If not, the political will may be found to put in place a deeper institutional framework to allow it survive.

Italian prime minister Mario Monti spoke this week of a dangerous “psychological dissolution” in European politics, in an interview with Der Spiegel. “There is a front line in this area between north and south. There are reciprocal prejudices,” he said. “It is very alarming and we must fight against it.”

Such morbid symptoms are typical of periods like these. “Fourth Reich,” proclaimed Berlusconi’s Il Giornale about German demands that Italy enter a rescue programme if it is to avail of a bond-buying exercise by the European Central Bank.

Monti later had to apologise for warning German readers about a return of Berlusconi on a populist anti-EU platform if that fails.

German-Greek prejudices are the prime example of such reciprocity. Only slowly is German opinion being weaned off the framing of Greece as typical of other southern spendthrift EU member states in spring 2010.

Conveniently, this disguised private capital flows from French and German banks that funded southern spending. Official Ireland would like to be classified as a northern not a southern state in this debate, but the bailout positions us with the south and we share an interest in their battle to get direct ECB funding.

Chancellor Merkel now says the German federal elections next year will be about Europe – and the same is true of Italy and the Netherlands in the meantime.

One of the great problems the German government faces is whether its more expansive European policies are constitutionally valid, as it awaits next month’s judgment by its constitutional court on the European Stability Mechanism.

And its spokesmen bristled this week at Monti’s remarks about the need for political leaders to have sufficient flexibility to bargain about the euro’s future without being tied down by the need for parliamentary endorsement, since the court made that an explicit condition of passing the Lisbon Treaty. The appointed technocrat Monti, after all, is hardly one to talk.

Such constraints of domestic politics in dealing with the crisis have provoked an impressive intervention from the German philosopher Jurgen Habermas, along with two other authors, in the influential German daily Frankfurter Allgemeine Zeitung, which editorially pursues a strict monetarist line on the euro. They see the need to link up domestic politics with transnational EU bargaining on the euro and also, crucially, to citizen outrage about the loss of democratic control over this, also expressed in protests against austerity.

They call on Germany to table an EU resolution convening a constitutional convention, the outcome of which would be put to a referendum there and elsewhere. This “is the only way to bridge the unavoidable time gap between the immediate economic measures that are due to be put in place, but which can still be revoked in the meantime, and the retrospective legitimation that may be required. If the results of the referendums are positive, the peoples of Europe could regain, at European level, the sovereignty that was stolen from them by ‘the markets’ a long time ago.”

They go on to say the strategy of treaty change “is designed to bring about the establishment of a politically unified core European currency area, which other EU countries – in particular Poland – would be allowed to join. This calls for clear thinking about the political make-up of a supranational democracy that would allow collective government without assuming the form of a federal state”.

Interestingly their piece has been echoed and endorsed by the German Social Democrat opposition, whose leader Sigmund Gabriel called this week for Germany to end its opposition to pooling euro zone debt in exchange for mutual budgetary oversight and joint fiscal policy.

He vowed to make his party agree to include in its campaign for next year’s election a poll to make such a move possible under the German constitution.

Such initiatives feed in to the “time-bound roadmap for the achievement of a genuine economic and monetary union” endorsed by the EU summit on June 29th. It sets out four essential building blocks: integrated financial, budgetary and economic policy frameworks and “strengthened democratic legitimacy and accountability”, and will report by December.

So this autumn will see a determined effort to put politics back in the foreground of the crisis, even while the ECB takes most of the economic strain.