Redundancy is one of the secrets of the modern economy’s success. Nuclear reactors and aircraft come with fall-back systems. Banks are supposed to keep enough capital in reserve so that a rash of bad loans doesn’t cause a breakdown. In the political economy, five systems are supposed to keep problems from turning into crises. In the euro zone, they have all gone down.
Two were already working badly years before the crisis broke. The governments of the major euro zone countries were fiscally reckless for years. So , how could they throw the first stone at Greece for its chronic budget deficits? And investors, supposedly vigilant and forward looking, priced Greek debt to yield only 1-1.5 percentage points more than comparable German debt until 2008.
Thanks to this double negligence, the post-Lehman recession created a problem with sovereign debt. That was bad, but not hopeless. Then the European Commission was so bad at putting pressure on Athens that it outsourced the job to the IMF. And the European Central Bank undercut its own efforts to instil confidence by continually drawing unrealistic lines in the sand, which it repeatedly crossed.
The problem has become a crisis that can only be resolved by mustering the popular will. Democratic government is supposed to do that in an emergency. There have been bursts of national unity in Ireland and Portugal. But Greece’s people and its leaders have been stuck in destructive discord. At least now it looks like a possible coalition government could be a first step forward.
So, a small and badly-governed country managed to bring the entire region – and the whole financial world – to the edge of disaster. The sequence of multiple failures suggests serious design flaws. The EU’s democratic deficit, its imbalanced fiscal and monetary authority and the hostile and ignorant media all bear some responsibility. The underlying flaws can all be corrected if the Europeans decide they want to. But the need for system repair is urgent. It’s not too late – but time is running very short.
