People are prone to cognitive dissonance. Americans want to cut the budget deficits but simultaneously reject reductions in popular programs or tax increases. Europeans demand a stronger economy but also wish to maintain their euro memberships, which is what is causing the trouble in the first place.
In a recent post, Indignados: Rebels Without a Cause | DARECONOMICS, I wrote that the problem is Spain is that protesters have failed to present an alternative course of action. The Spanish situation applies to the rest of the crisis-hit countries. There is no Plan B. Either side, left of right, has not changed course in its crisis-fighting efforts.
Voters have ceded a great deal of sovereignty to European institutions over the years, and now they are dealing with the consequences. The eurozone necessitates one monetary policy for 17 very different economies. While each eurozone country has the same regulatory burdens, the lack of transfer payments does not mitigate their costs in the poorer countries unlike in a true currency zone like the United States.
However, if these countries so chose, they could leave the eurozone whenever they like, but really they can’t. The only thing keeping them afloat is German money or the promise of German money. Greece, Portugal, Ireland and soon to be Cyprus would be bankrupt without bailouts. Spain and Italy could not sell debt at such low rates without the ECB put.
This largesse is not free. Northern tier voters resent bailing out the periphery, so political cover must be given. This takes the form of austerity.
Until now everyone has played along. Switches from left to right or right to left have made no difference in a country’s crisis fighting efforts despite campaign promises to the contrary.
Italy has broken the mold. The Democratic Left wishes to continue the austerity program, but cannot form a government without the support of either the Grillo or Berlusconi bloc. Grillo will not support austerity, and who the hell knows what Bunga will do.
Italy could change course, and its election results may prove prescient. Fringe parties are growing in strength throughout the periphery upsetting the delicate political balance that has ensured adherence to the austerity model.
The cost of a euro breakup is prohibitively high for all 17 countries, but that factor is changing. Once it becomes cheaper to exit and a political party supports this choice, the eurozone could dissolve in days.
A eurozone exit is drastic, but I do not understand why these peripheral countries seem to be such poor negotiators. The euro’s greatest beneficiary is Germany. It has the most to lose from a breakup. Why don’t the crisis countries use this leverage to get a better deal?
For now, continued adherence to European directives seems to be the only game in town, and this ensures stability no matter who is in power in these countries.