This promises to be a rather turbulent autumn for the single currency. Greek elections are is coming in ten days, the Portuguese one will follow in October, and then Spain (and Catalonia) will go to the polls in December. The debate over austerity has been vibrant in Greece as well as in Portugal (they both ended up in the economic adjustment program) and in Spain.
The Greek voted for an anti-austerity option earlier this year, by putting Alexis Tsipras and his hard left coalition "Syriza" in government. Tsipras and Syriza have been less than brilliant in managing Greece's affairs, and now they seem to be dropping in opinion polls. One could argue that the "austeritarian" Portuguese and Spanish governments, both led by center-right majorities, provided a better performance. However they took plenty of unpopular positions and, in the case of Spain, also had to face political scandals. In Portugal the alternative to established center-right parties is established center-left parties, but in Spain the local equivalent of Syriza, Podemos, comes to the fore. It is easy to predict that these elections will be considered as a referendum over fiscal consolidation, or the euro itself.
But now Europe has even more serious problems to manage than the common currency. The economic discussion has been completely overshadowed by that on migrants and immigration, with strong political differences developing between Germany and not only Hungary and Eastern European countries, but also Denmark and the UK.
Ben Wright, of the Daily Telegraph, has wrote an interesting piece on the future of the common currency. The political elites' view is that all of Europe's problems will be solved by "an ever closer union." It might or might not be true. But it is safe to predict this "ever closer union" is not going to happen. The messy debate on refugee quotas signals how difficult, and unpopular, is to transform the idea of overcoming "national democracies" into an action plan. So is this bad news for the future of the euro? Well, it could be good news. Here's the conclusion of Wright's sensible article:
So, if the present set-up is, by broad agreement, a mess, a eurozone finance ministry without a political mandate would be "dangerous" and the chances of a political union are, again according to Issing, "close to zero", where does this leave European monetary union?
Needing to make the best of a bad job is the short answer. For one thing, it is hard to imagine the genie of a potential exit being stoppered any time soon. That being the case, why not make a virtue out of a necessity?
It was, after all, the threat of being booted out of the club that persuaded Tsipras to renege on his election promises and accept a deal that was, whatever you think of the specific terms, the country's only chance of remaining in the eurozone; removing the treat [sic] of an exit from the eurozone removes the ultimate incentive to abide by its fiscal rules.
Equally, there was very little sign as Greece's crunch drew closer of financial contagion spreading to other eurozone countries. Indeed, Syriza's perceived defeat appears to have also stemmed political contagion with some populist parties like Spain's Podemos recently losing ground in the polls. It would also prevent countries from claiming they had been denied the right to make democratic choices. Don't like the rules? Well, there's the door.
Coupled with the mechanisms to allow countries to default on their debt (as Greece should have done in 2010), the threat of an exit would minimise moral hazard and reintroduce market discipline to the euro. Would it mean that some countries had to pay more to borrow money? Yes. But is that a bad thing?