The rough politics of European adjustment

MICHAEL PETTIS, of China Financial Markets, reports on ”The rough politics of European adjustment.” – Ilene 

Courtesy of MICHAEL PETTIS

If Europe is going to “resolve” the current crisis in an orderly way, it is going to have to move very quickly – not just for the obvious financial reasons, but for much narrower political reasons.  I am pretty sure that the evolution of European politics over the next few years will make an orderly solution progressively more difficult.

For ten years I have used mainly an economic argument to explain why I believed the euro would have great difficulty surviving more than a decade or two.  It seemed to me that the lack or fiscal centrality and full labor mobility (and even some frictional limits on capital mobility) would create distortions among countries that could not be resolved except by unacceptably high levels of debt and unemployment or by abandoning the euro.  My skepticism was strengthened by the historical argument – no fiscally fragmented currency union had ever survived a real global liquidity contraction.

I am now going to veer off into a very different realm, that of politics.  I don’t in any sense pretend to be an expert on the subject, but one of the things that surprises me is that as far as I know (perhaps because I am looking in the wrong places) and in spite of very clear historical precedent, very few analysts, even the greatest euro-skeptics, are wondering about of the changes in electoral politics that are likely to take place in Europe over the next few years as a consequence of the euro adjustment.  For example Wolfgang Munchau has an excellent article in the Financial Times in which he concludes, like I did in my post last week, that:

The eurozone is manoeuvring itself into a position where it confronts the choice between two alternatives considered “unimaginable”: fiscal union or break-up.

Obviously I think he is right, but I would add that the window for that choice is a small one.  If Europe doesn’t move quickly, within two or three years it will probably be very difficult, if not impossible, to engineer fiscal union.  By then domestic politics are likely to be too unstable for the European political elite simply to arrange union over the heads of the citizenry.

I have addressed the issue briefly before.  After…

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