From Overseas Press

Euro zone crisis: it's the politics, stupid!

(Agencies)
Updated: 2010-06-01 09:19

Bill Clinton famously won the US presidential election in 1992 with the motto "It's the economy, stupid." But when it comes to the future of the euro, "It's the politics, stupid!" is the more appropriate slogan.

Since its inception, the single European currency has always been as much a political as an economic project.

The euro has come under attack on financial markets this year because of debt and deficit problems in its weaker southern members, most acutely in Greece but also in Portugal and Spain, and growing economic imbalances among its 16 nations.

But the history of the 1990s shows that investors who bet against European monetary union can get their fingers burned.

While political mistakes could yet undo the 11-year-old monetary union, it is far more likely that Franco-German political leadership will save it.

"If the euro fails, not only the currency fails. Europe fails too, and the idea of European unification," German Chancellor Angela Merkel said in a May 13 speech. "This test is existential--it must be passed."

In Paris, too, the political will to do whatever it takes to underpin the euro is absolute.

President Nicolas Sarkozy may have been impatient with Merkel's slow decision-making during the crisis, and too eager to claim political credit for giant rescue packages for Greece and the wider euro area.

But he has moved a long way toward supporting German calls for stricter sanctions to enforce budget discipline in the euro zone, even calling for a German-style constitutional amendment in France to anchor a commitment to deficit reduction.

PRIMACY OF POLITICS

Merkel has talked repeatedly of the need to restore "the primacy of politics over the financial markets" to justify her support for a $1 trillion reserve fund to stabilize the euro.

Some of her own actions, under domestic political and legal pressure, have contributed to the crisis of confidence.

She delayed an unpopular financial rescue for Greece until contagion began spreading to other southern European countries. Her stark warning that the euro was in danger, meant to rally voter support for bailing out Greece, rattled investors.