The European Union is a voluntary quasi-federationof sovereign and democratic states in which elections matter and each countryseeks to determine its own destiny, regardless of the wishes of its partners.But it should now be apparent to everyone that the eurozone was designed with avery different institutional arrangement in mind. Indeed, that design gap hasturned out to be a major source of the monetary union’s current crisis.
Last October, Greece’s then-primeminister, George Papandreou, proposed a popular referendumon the second rescue package that had just been agreed at the EU’s summit inBrussels. He was quickly told off by GermanChancellor Angela Merkel and former French President Nicolas Sarkozy, andGreeks never voted on it.
But, less than a year later, the referendum is de factotaking place anyway. In a union of democracies, it is impossible to forcesovereign countries to adhere to rules if their citizens do not accept themanymore.
This has profound implications: all of those grandiose plans to create a political union tosupport the euro with a common fiscal policy cannot work as long as EU membercountries remain both democratic and sovereign. Governments may sign treatiesand make solemn commitments to subordinate their fiscal policy to EU rules (or tobe more precise, to the wishes of Germany and the European Central Bank). But,in the end, the “people” remain the real sovereign, and they can choose toignore their governments’ promises and reject any adjustment program from“Brussels.”
In contrast to the United States, the EU cannot send its marshals to enforce its pacts or collect debt. Anycountry can leave the EU, and thus the eurozone, when the perceived burden ofits obligations becomes too onerous. Untilnow, it had been assumed that the cost of exit would be so high that it wouldnever be considered. That is no longer true, at least for Greece.
But, more broadly, EU commitments have now become relative,which implies that jointly guaranteed Eurobonds cannot be the silver bullet that some hope. As long as memberstates remain fully sovereign, no one can fully reassure investors that in theevent of a eurozone breakup, some states will not simply refuse to pay, or atleast refuse to pay for the others. It is not surprising that bonds issued bythe European Financial Stability Facility (the eurozone’s rescue fund) aretrading at a substantial premium over German debt.
All variants of Eurobonds come with supposedly strong conditionality. Countries that want to usethem must follow strict fiscal rules. But who guarantees that these rules willactually be followed? François Hollande’s victory over Sarkozy in France’s presidentialelection shows that an apparent consensus on the need for austerity can crumble quickly. What recourse do creditorcountries have if the debtor countries become the majority and decide toincrease spending?
The recently agreed measures to strengthen economic-policycoordination in the eurozone (the so-called “six pack”) imply in principle thatthe European Commission should be the arbiterin such matters, and that its adjustment programs can formally be overturned only by a two-thirds majority of themember states. But it is unlikely that the Commission will ever be able toimpose its view on a large country.
Spain’s experience is instructive in this respect. Afterthe recent elections there, Prime Minister Mariano Rajoy’s new governmentannounced that it did not feel bound by theadjustment program agreed to by the previous administration. Rajoy was roundly rebukedfor the form of his announcement, but its substancewas proven right: Spain’s adjustment program is now being made more lenient.
The reality is that the larger member states are more equalthan the others. Of course, this is not fair, but the EU’s inability to imposeits view on democratic countries might actually sometimes be for the best,given that even the Commission is fallible.
The broader message from the Greek and French elections isthat the attempt to impose a benevolentcreditors’ dictatorship is now being met by a debtors’ revolt.Financial markets have reacted as strongly as they have because investorsrecognize that the “sovereign” in sovereign debt is an electoratethat can simply decide not to pay.
This is already the case in Greece, but the fate of theeuro will be decided in the larger, systemically important countries like Italyand Spain. Only determined action by their governments, supported by theircitizens, will show that they merit unreservedsupport from the rest of the eurozone. At this point, nothing less（than action by their governments, supported by their citizens） can save the common currency.