Political leadership and the eurozone

Yesterday, in commenting on the eurozone crisis, Barack Obama said the two words all political scientists hate to see: 

"Europe is wealthy enough that there’s no reason why they can’t solve this problem," Obama told reporters at the White House.

"If they muster the political will, they have the capacity to settle markets down, make sure that they are acting responsibly and that governments like Italy are able to finance their debt." (emphasis added)

By and large, political scientists hate the concept of political will.  As I’ve said numerous times on the blog, "political will" is usually tantamount to saying, "if only politicians would completely ignore short-term political incentives and do the right thing!"  Or, to put a finer point on it, "if only politicians stopped acting like politicians!"  Because we as a profession tend to focus on structural forces and immutable preferences, "leadership" as a variable often (though not always) falls by the wayside. 

Looking at the latest EU summit/eurozone machinations, however, I’m beginning to wonder if we need to think about "first image" explanations for what just happened.  As the Wall Street Journal, Felix Salmon, Financial Times, Paul Krugman,  and Economist are all reporting, it was pretty friggin’ disastrous.  Salmon provides the most complete autopsy — here’s a snippet: 

[A]nother half-baked solution is exactly what we got. Which means, I fear, that it is now, officially, too late to save the Eur ozone: the collapse of the entire edifice is now not a matter of if but rather of when.

For one thing, fracture is being built into today’s deal: rather than find something acceptable to all 27 members of the European Union, the deal being done is getting negotiated only between the 17 members of the Euro zone. Where does that leave EU members like Britain which don’t use the euro? Out in the cold, with no leverage. If the UK doesn’t want to help save the euro — and, by all accounts, it doesn’t — then that in and of itself makes the task much more difficult.

But that’s just the beginning of the failures we’re seeing from European leaders right now. It seems that German chancellor Angela Merkel is insisting on a fully-fledged treaty change — something there simply isn’t time for, and which the electorates of nearly all European countries would dismiss out of hand. Europe, whatever its other faults, is still a democracy, and it’s clear that any deal is going to be hugely unpopular among most of Europe’s population. There’s simply no chance that a new treaty will get the unanimous ratification it needs, and in the mean time the EU’s crisis-management tools are just not up to dealing with the magnitude of the current crisis.

The fundamental problem is that there isn’t enough money to go around. The current bailout fund, the European Financial Stability Facility, is barely big enough to cope with Greece; it doesn’t have a chance of being able to bail out a big economy like Italy or Spain. So it needs to beef up: it needs to be able to borrow money from the one entity which is actually capable of printing money, the European Central Bank.

But the ECB’s president, Mario Draghi, has made it clear that’s not going to happen. Draghi is nominally Italian but in reality one of the stateless European technocratic elite: a former vice chairman and managing director of Goldman Sachs, he’s perfectly comfortable delivering Italy the bad news that he’s not going to lend her the money she needs. He’s very reluctant to lend it directly, he won’t lend it to the EFSF, and he won’t lend it to the IMF. Draghi has his instructions, and he’s sticking to them — even if doing so means the end of the euro zone as we know it.

So, what explains this mess — the inexorable structural problems of the European Union, or the lack of political leadership?  At this point, I’m genuinely uncertain.  For example, the facile explanation for British Prime Minister David Cameron’s rejection of an EU treaty is catering to his domestic interests — namely the British financial sector.  Then, however, we get to this bit from the Economist: 

After much studied vagueness on his part about Britain’s objectives, Mr Cameron’s demand came down to a protocol that would ensure Britain would be given a veto on financial-services regulation (see PDF copy here. The British government has become convinced that the European Commission, usually a bastion of liberalism in Europe, has been issuing regulations hostile to the City of London under the influence of its French single-market commissioner, Michel Barnier. And yet strangely, given the accusation that Brussels was taking aim at the heart of the British economy, almost all of the new rules issued so far have been passed with British approval (albeit after much bitter backroom fighting). Tactically, too, it seemed odd to make a stand in defence of the financiers that politicians, both in Britain and across the rest of European, prefer to denounce….

Britain may assume it will benefit from extra business for the City, should the euro zone ever pass a financial-transaction tax. But what if the new club starts imposing financial regulations among the 17 euro-zone members, or the 23 members of the euro-plus pact? That could begin to force euro-denominated transactions into the euro zone, say Paris or Frankfurt. Britain would, surely, have had more influence had the countries of the euro zone remained under an EU-wide system.

As for Merkel, well, my take on her leadership style has been documented already.  She’s dealing with an opposition that is castigating her for not taking swifter and more drastic action to resolve the eurocrisis.  In response, she’s pushing for changes that will take months, if ever, to accomplish — and, if they are accomplished, have no guarantee of actually solving the problem.  It doesn’t seem like the eurozone has that time. 

As for Draghi, well, one could attribute his range of half-hearted measures to his excessively cautious leadership — after all the ECB is an ostensibly independent institution, so presumably Dragh has the greatest amount of autonomy.  It’s not that simple, however — Draghi wouldn’t have been selected as the new ECB head unless he demonstrated the kind of policy traits that made him acceptable to Germany in the first place.  Oddly enough, although Draghi currently has the most freedom of action, the structures that ensured he would become the new ECB head ensured he would be the least likely person to exploit that freedom. 

So, stepping back, there appears to be a role for the quality of political leadership as an explanatory factor for the current eurozone crisis.  Properly defining that role, however, is beyond the capacity of this blog post. 

What do you think?