Judy Asks: Can the Euro Crisis be Solved Politically?

What exactly is the euro crisis? Is it the product of government overspending? The result of trade and investment imbalances within Euroland? Or is the problem one of undercapitalized and overexposed private banks? Perhaps all of the above? A convincing answer to the question is impossible if we don’t know what it is we are talking about.

By pursuing an elusive “one size fits all” answer, politics can, and indeed has, made things worse. Telling those with nothing that the route to prosperity is through saving, makes no sense at all. One has to have something to save in the first place. On the other hand, it is folly to imagine that states can create the wealth necessary to balance public and private accounts. At best, politics can promote private sector investment and innovation that can lead to the wealth creation on which the future of the euro ultimately depends.

The euro crisis can only be solved politically, because while it is an economic challenge, it is essentially a political problem. The eurozone countries—and the larger EU—are paying a very high economic price for their inability to resolve what is a very tough political decision. When the euro was created, its founders did not create a fiscal union to match the new monetary union, and they did not provide for adequate crisis management mechanisms. Now their successors must decide: are the countries involved prepared to take another major step towards deeper integration, with all that implies for national sovereignty, or are they content to stick to a looser confederation, with all that implies for Europe’s ability to remain competitive in a G20 world? Significant economic consequences will emerge from that eventual decision, but it is at its heart a political choice. Political leaders may try to muddle around that decision, but such muddling also essentially means they have made their choice, and are reaping the consequences.

Yes. European leaders must adjust to the changing political mood of European citizens, but must not give up economic rationality at the same time. The encouraging result of the Irish referendum does not mean that there is no longer a need for a shift regarding actions and especially going into debates again and again about the euro crisis in each member state. Even pro-European groups argue in favor of compromises, just like the young organizers of flash mobs using the slogan “We are all Greeks! We are all Europeans!” Criticizing the lack of involvement of people, they have declared on Facebook that “it is possible to go the way of European cohesion and solidarity and, at the same time, find a feasible path out of the crisis, not only for Greece but for the whole EU.” The responsibility of top politicians is to find a common voice among those citizens who might disagree with the rhetoric expressed in the Fiscal Pact and would like to listen to more encouraging messages, but do not want to fall into the hands of populist, nationalist, and irrational political forces on the domestic and European levels. This is the necessary art of politics today.

The euro crisis can only be solved by political will.

The crisis isn't triggered just by the debt numbers but just as much by the jittery and piecemeal handling between national and European levels. That keeps the pressure on eurozone countries. The EU's aggregate debt level is actually lower than Japan and the U.S.

The euro and its member states are being scrutinized by markets because of the potential lack of solidarity and joint risk taking. Will the countries vouch for one another if they fall? Even with the European Financial Stability Facility and European Stability Mechanism schemes, that answer seems uncertain, particularly leading up to the next Greek election, where an also irresponsible political class is due to be ousted. Yet this enhances risk since the potential new leaders won't accept the debt deals previously agreed.

Still, a political solution demands economic tools. Enhanced fiscal rectitude is part of the solution, but right now the answer might rather be establishing ways of ensuring a sort of banking union, so that national banks are underwritten at the European level. Another element is creating some clever way of jointly underwriting national debt at the European level without completely removing moral hazard at the national level.

See Spain's problems which are mainly in the private sector and its banks. Its public debt is still relatively low—lower than Germany's where in contrast trust and money flow in abundance. Spain's public debt could balloon if it has to absorb the private sector. Here a joint take at European and national levels on banks is what really matters.

The positive thing to add is that political will—if mustered—costs less than other scarce commodities.

Politics is actually the only available option. Markets are hopelessly anxious. The experts, economists, or historians are divided in fierce tribes on opposite turfs. A calm, rational leader could do the trick of saving Greece, paying the price, starting up the economy, establishing a blueprint for a federal debt, like Hamilton in the newborn USA. We all admire the vision and boldness of the Marshall Plan, but Congress was sharply divided back then: Taft and the Republican Party fought against it, while on the Left, former vice president Wallace called it the "martial plan". Warren Buffet's father, Congressman Howard Buffett, a republican from Nebraska labeled the Marshall plan "Operation rat hole...a barrage of propaganda...drenching this country". Buffett Senior accused President Truman of "tricks of political terrorism". Our leaders get scared by a focus group and relent if a tabloid paper screams a little louder about Greece, euro versus Deutsche mark, Germany. History is not kind to Taft and Buffett, while Truman and his advisers are considered the ultimate "wise men". Europe needs a true political leader with a vision and a strategy, ready to get and return flack. Do you see him or her? I do not.