Europe's Economic Crisis -- Follow the Politics

If you've been following the Eurozone's crisis but have found the economic technicalities trying (or worse, boring) don't despair. The roots of the crisis, the obstacles impeding solutions, and the consequences of success or failure are essentially political.

The technicalities of bond yields, the implications of creating Eurobonds, the appropriate size and ground rules of the proposed European Stability Mechanism (ESM), the proper role of the European Central Bank (keeping inflation low vs. providing stimulus to economies crippled by massive unemployment and stalled growth), and the pros and cons of cutting budgets as opposed to running short-term deficits to create jobs and increase demand -- these are all undoubtedly important.

But ultimately the economic decisions will depend on what European leaders -- those needing help and those able to give it -- decide they can do politically.

German Chancellor Angela Merkel leads the European Union's powerhouse and is certainly no economic neophyte. She knows that the downside of pushing Greece and Spain to slash public spending is that their unemployment rates could increase, thus reducing demand and preventing the economic recovery that will produce the increased tax revenues required to reduce their debt and increase their creditworthiness. She also understands that the worse things get in Spain, the more likely that the bond markets will make life untenable for Italy's leaders, and that the euro itself will then be in (greater) peril.

Yet Merkel isn't an economics professor; she's a politician and, as such, can't ignore the political reality that German taxpayers are unwilling to guarantee bonds that will allow the Greek, Spanish, and Italian governments to borrow at lower interest rates, or to make big contributions to schemes that will enable them to revive their economies by spending more in hopes of creating jobs and boosting demand. On the streets of Stuttgart or Hamburg, it doesn't much matter what Keynes said.

True, Germany's big export surpluses have been enabled in large measure by the big imports of the very European countries now being castigated for their profligacy. So it is in Germans' self-interest to help them recover. But imagine Merkel the politician making this pitch to the German electorate.

For all the happy talk of the European Union having created a unity that has transcended nationalism, the reality is that that stubborn sentiment remains alive and well on the continent. Germans won't write checks or take big economic risks for foreigners (even of the European variety) who, as they see it, are suffering from self-inflicted wounds. Pumping huge sums of money -- over 1 trillion euros since 1990 -- into the former East Germany was one thing; making sacrifices for Greeks and Spaniards, let alone for "Europe," is another.

Likewise, while Greek and Spanish leaders understand that they must cut government spending, they can't keep doing so at the risk of losing ground to opposition parties that accuse them of succumbing to the diktat of a German-dominated EU and ignoring the plight of the poor, the unemployed, and the retired. Elections are not imminent in either country, but in democracies all politicians are exquisitely and perennially sensitive to polls, and the risk of social unrest in Greece and Spain is ever present.

So imagine Greek Prime Minister Antonis Samaras telling his fellow citizens that, yes, he feels their pain, but that, unfortunately, it's the price they must now pay for their rampant tax evasion and attachment to social programs that had to be financed by running red ink.

Picture Spanish Prime Minister Mariano Rajoy -- whose country's problems, unlike Greece's, stem from the insolvency of its banks rather than outsize government spending -- giving a national television address, the gist of which is that, yes, the bankers messed up and damaged the economy, but now everybody has to pay for the repairs and that bigger bills await. That refrain won't be well received at a time when a nearly a quarter of the Spanish workforce is jobless and feels that it's footing the bill for the blunders of well-heeled bankers.

Politics also explains the roots of the Eurozone's crisis. A common economic explanation is that what's happening was bound to happen because the EU foolishly decided to create a monetary union without a fiscal counterpart. That's true as far as it goes, but the choice didn't result from economic illiteracy. Countries were simply unwilling to transfer that much political power to distant European institutions and bureaucrats.

The primacy of politics applies to the future as well. It's in the political realm that we'll see the biggest results of the Eurozone's success, or lack thereof, in solving its economic crisis.

If it succeeds, the idealistic post-World War II project of pan-Europeanism will survive, even if the Eurozone may not retain all of its current members. The coordination of domestic and foreign policies and EU enlargement will resume, albeit at a reduced tempo, and Europe will prove that it is indeed more than the sum of its parts.

If it fails, European politics will be transformed as parties with nationalistic, populist, anti-immigrant platforms overshadow moderate ones. "European" positions on major global issues will prove elusive. NATO's unity and sense of purpose, already hard to maintain in a non-Soviet world, will fray as American presidents, facing their own budgetary pressures, push European allies to spend more on defense and the latter, preoccupied with domestic problems and facing inward-looking voters, refuse.

So if you find the economic details of Europe's crisis soporific keep your eyes on the politics. That's the main event.