German Chancellor Angela Merkel has made headlines by openly considering the possibility of a political union and calling for "more Europe, not less" for the first time this week. There is no doubt that this is what the European Union requires if it plans to come up with a sustainable response to the debt crisis. They cannot go on plugging debt holes with money bags.
To begin with, Italy’s refinancing needs are too massive; it requires an amount that would drain the European Financial Stability Facility (EFSF). More crucially however, the debt crisis is no longer about the levels of sovereign debt, but about investors' perception of it. The ECB cannot treat all sovereign bonds in an equivalent manner as it once did; the EU’s fiscal and monetary policies must converge if they are to be united by a single currency.
However, Brussels seems to be following a most undemocratic model to achieve this new political union. Germany and France have helped to push out two governments last week — in Greece and Italy, installing unelected technocrats in their place in a dangerous political move. Italy’s new Prime Minister Mario Monti is a former EU commissioner, while Greece's new Prime Minister Lucas Papademos was a former vice president of the ECB. These new leaders will impose austerity measures without much fuss, since they are bankers, not politicians, and they will not be swayed by public opinion.
It has been pointed out that Greece isn’t allowed to elect a new government until mid-February after the bailout money has been approved, the conditions are set in stone, and it’s too late to consider the public’s view. The next “elected” government will in effect be the lender’s puppet. Can we call a country that is not allowed to elect their leaders a democracy? It seems that we are seeing the demise of the concept in the country that is its cradle.
This is a precarious game for Germany and France to play and is cronyism at its most blatant. The lenders are literally holding governments ransom as they choose leaders they know share their views, at a time while the weaker governments are on their knees, felled by market panic and public anger.
We cannot replace governments based on volatile market movements. Yes, these leaders will push through reforms. Yes, inducing investor confidence is key to the crisis, to prevent the outflow of money and a bank run, the markets must be appeased. Yes, the markets celebrated when Berlusconi was replaced, but it was a short party as markets, with their short attention span, turned back to Greece quickly. Yields on Spanish, Italian, and Belgian bonds are rising again, as euro zone sovereign bonds that were considered to be risk-free are clearly no longer viewed as so. The death spiral is back on.
Time is running out for Merkel and French President Nicolas Sarkozy themselves. How long can they hold onto their own seats? Markets will continue to be in free fall until the ECB agrees to act as a lender of last resort, because having EU leaders play a game of musical chairs will not make this problem go away.
Perhaps the inevitable consequence of borrowing money is allowing lenders to dictate terms. But a country cannot be asked to pay with its sovereignty. Additionally, the EU itself is trying to raise money for its bailout fund from China and other emerging market nations. They need to consider the consequences of their own actions, as they set a risky example of what is and isn’t acceptable in global diplomacy.
Brussels cannot be allowed to decide leaders for economically weaker countries. This move is both undemocratic and ineffective.
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