During the summer of 2012, it was all too easy, especially for financial analysts (whose expertise is on finance rather than politics), to summarily conclude that the E.U. was not capable of keeping the states of Greece and Spain from default. Perhaps the human brain has an innate proclivity to think in bipolar terms in the sense that something (or someone) is presumed either “good” or “bad.” Empirically, social organization, which includes politics and finance, is typically more gray than “black and white.” This is undoubtedly the case concerning the political risk analysis that goes into assessments of systemic risk, especially where uncertainty is salient. In general terms, I would say that as of 2012 the anticipated demise of the euro (and even the E.U.) was much exaggerated. Somehow or other, European policy-makers were able to hold the federal ship-of-state together in spite of its vulnerabilities.
For example, by the end of October 2012, it had become clear that Angela Merkel’s governing coalition would put up only limited resistance to an expanding the E.U.’s bailout to Greece and giving that state two years “breathing room” by easing the “onerous timetable of Greece’s austerity program.” In spite of it being the third bailout for Greece since 2010, the overriding concern was that Greece not default and that it be kept in the “eurozone.” One of the state lawmakers in Germany, Hans Michelbach, said the governing coalition is willing to give Greece two extra years to cuts its budget deficit and extra financing to keep the state afloat.
To be sure, the political need to keep the lid on the “crisis” until after the German elections in the fall of 2013 was no doubt a factor in the conservatives’ willingness to pay out more and relax the conditions of austerity. The recent replacement of Sarkozy by Hollande in France was also no doubt on the German politicians’ minds. According to one political scientist in Bonn, “nobody wants to endanger the current calm in financial markets.”
The state governments play a major role at the federal level in the E.U. Source: mapperyworldpress.com
It makes for a leaky boat at best for the E.U. to have to rely on the vicissitudes of state politics to keep a state from bankruptcy (and in the “eurozone”). A financial analyst could easily extrapolate out a scenario of demise from this patch-work arrangement. However, it was also evident that Angela Merkel and others in power had decided during the summer of 2012 that they would do what it takes to keep Greece afloat. Moreover, there was a sense after the Greek and Dutch state elections that the E.U. was on a threshold—whether to walk back the integration or take another step closer—and that the decision was to go ahead with a more integrated track.
Countervailing political forces, such as the increasing influence of the Finns Party, whose platform includes taking Finland of the euro, can be viewed relative to the overall determination of major state-level governors to “do what it takes.” Even in terms of Finland, the National Coalition Party and Social Democratic Party, both of which support the euro, had a combined 40.7% in the polls even as the Finns Party had risen to 15.6% (polled for municipal elections in October 2012) from 5.4% in 2008. That is to say, the rise in anti-euro sentiment should be put in perspective even within a given state.
In conclusion, the sub-optimal reliance on state leaders to craft E.U.-level policy on the debt crisis—a reliance for which Europe itself can be blamed—sadly meant that coalition politics in the state of Germany had become crucial to the fiscal viability of the euro and the financial markets at the E.U. level. Nevertheless, enough cohesion had been built around the problem by the power-brokers in the big states to withstand countervailing political and even economic forces. This informal consensus can easily be dismissed by financial analysts who are limited by their financial expertise to assess the political aspect of the systemic risk according to the structural attributes (feebleness) of the E.U., which include the over-reliance on the governments of the big states.
Mary Lane, “German Lawmakers Shift Toward Extending Greek Aid,” The Wall Street Journal, October 27, 2012.
Denise Wall, “Finnish Nationalists’ Pre-Vote Surge Sets Stage for Debate Over Euro,” The Wall Street Journal, October 25, 2012.