Friday, November 18, 2011

The Power of One

European institutions, including the Eurozone, remain treaty organizations whose members are sovereign countries.  This is why important policy decisions have to be unanimous.  As a result, we have heard the lament that small, wayward countries have an unwarranted veto power and can hold everyone else hostage.  You know, the Finns, the Slovaks and their ilk.

In fact, the small and weak do not have this power.  If they try to throw sand in the gears, they will be put in their place one way or another.  A country like Finland, for instance, is simply too vulnerable to political and financial pressure to try to dictate Eurozone policy single-handedly.  Was anyone surprised when the True Finns, a party that campaigned on xenophobic nationalism, backed down and allowed the latest Greek financing package to go through?

The real threat to multilateral institutions has always been the veto power of the strong.  This is true of the US within the UN system, and it is increasingly clear that it is true of Germany in the current euro fiscal crisis.  As the moment of reckoning draws near, and as the need for a true lender of last resort to backstop euro-denominated credit becomes inescapable, one after another, the members of the zone are falling into line and demanding that the ECB mature into a real central bank.

Everyone except Germany.  Angela Merkel draws her line in the sand: “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.”  Hans-Werner Sinn, an economist whose every pronouncement is accorded scriptural authority, spits out the epithet “printing press” six times in a recent op-ed demanding that the ECB remain neutered.

In a nutshell, the German position is that any risk of inflation, no matter how small the inflation or the risk, outweighs the possibility of a financial meltdown resulting from a shortfall of euro liquidity.  If a country undergoes a run on its banking system or sovereign debt (typically connected), it is a sign of profligate living, and the specter of default is needed as an incentive for “reform”.  This attitude—and it is simply an attitude, not a rational economic argument—is the proximate reason why the global economy is on the brink.

So Germany, the biggest, strongest, richest country in the Eurozone is the rogue state, exercising its veto in increasing defiance of world opinion.  Forget the True Finns; the parties whose absurd demands are threatening to plunge Europe, and the rest of us, into crisis have names like the Christian Democrats, the Free Democrats, the Social Democrats and the Greens.  Will any of them start to crack before it's too late?

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