One of the more frustrating aspects of the European sovereign debt crisis has been the failure of many in Europe's ruling class to tackle the issue head on. Even leaving behind the history of how we got into this mess in the first place, the political obstacles that have come to the forefront over the last few weeks have highlighted the lack of credible leadership in many places, notably Greece and Italy.
In order to rescue the eurozone, this leadership deficit will need to be addressed. And it's not clear that technocrats can fill that vacuum. If they can't, the markets are in for a wild ride with no one behind the wheel.
More Greek Drama?
Greece's failures to produce an effective government have been well documented. Seemingly endless news reports have documented rampant tax evasion, very generous public pensions, and major issues in running state businesses. It's clear that there was a chronic failure to grapple with economic reality.
Former Primer Minister George Papandreou highlighted the dysfunction recently when he called for, then withdrew, a referendum on the EU bailout. The shock that Greece may not be able to hold its end of the bargain made markets wobbly yet again. And internal political squabbling was on full display last week as well. It took until Thursday to appoint Lucas Papademos as the head of the unity government that is supposed to lead Greece down a more austere path.
The jockeying for position highlights that it is much easier to call something a unity government then to actually have unity on the critical questions of the day. The global financial community is now expecting a government made of a few new, unelected, technocratic leaders to suddenly come together and craft effective solutions. This could very well happen, but the weight of history is not on their side. The entire political elite would have to change their outlook and the Greek people would have to really buy into the importance of the structural reforms. It's not clear that either of those things will happen even if there is a new person at the top.
Italy's in the Same Boat
Italy is in a very similar position, but with an even more fluid political dynamic. For years, the country has managed to stay just under the financial crisis tipping point. They do just enough to keep things from blowing up, but lose their courage when it comes to instituting long-term structural reforms. Former Prime Minister Silvio Berlusconi has paid lip service to reform for years but has failed to truly deliver.
Berlusconi's departure hasn't exactly brought clarity to the Italian political situation. Former European Union Commission member Mario Monti embarks on his first full day as Prime Minister today, but how long can this unity government survive before facing the voters? There is still a lot of dissent within parliament, and any new government isn't likely to be stable or to have the mandate to make sweeping changes. They may end up facing voters sooner rather than later. The prospect of conducting a general election campaign in the midst of a financial crisis is slightly disconcerting. Instead of politicians being laser focused on what needs to happen to keep Italy from financial ruin, they are going to be worrying about simmering domestic disputes--not something that is going to instill a ton of confidence in the marketplace.
Greece and Italy are clearly the most obvious political failures at the moment, but much of the rest of Europe is hardly off the hook. The European Union and the common currency are hardly set up to make decisions in a timely manner. Needing to have all members approve anything important is a recipe for gridlock. The system gives a single country (say, Slovakia) the power to stop any emergency reforms that would be needed to keep the euro from collapse. If the situation gets even further out of hand, it is hard to see where the EU will get the courage to really step up to the plate and intervene where necessary.
Long-Term Problems
This lack of leadership is more than just a short-term problem that could create temporary waves of volatility in the marketplace. It is a serious long-term issue that threatens to keep popping up, potentially over the course of decades. It is going to take a very long time to fully solve the sovereign debt crisis. There is no magic bullet, no one policy that will instantly make all of these problems disappear. It's going to be a long, slow battle to reform and adapt. This means that governments are going to need to be in the reform business for the long haul.
The technocratic governments in Greece and Italy will only be able to implement the first steps of the process, and it isn't clear how much popular support they will really have. Unelected leaders are by their very nature going to have short shelf lives. And the popular unrest in Greece, Italy and elsewhere is only going to rise as further austerity measures are implemented. It's not impossible to see six months from now these governments being kicked out and the bailout negotiations going back to square one. The troubled European countries need to find real leaders that have a clear mandate from citizens to make reforms if there is any hope for the economic security of the continent.
Spain, Ireland and even Portugal are great examples of exactly how much this can do. Since their bailouts, these countries have taken great strides in making reforms and have soothed investor fears about their ability to pay back debts. It's no surprise you rarely hear about the PIIGS anymore. It's because Ireland, Spain and Portugal have mostly dropped out of the conversation. If Italy and Greece can follow suit, we may finally be on the road to redemption. If not, the world will continue to lurch from political crisis to political crisis and we can expect lots of backtracking, uncertainty, and volatile markets in the coming years. It won't be pretty.
What do you think? Can Greece and Italy find competent governments? How long can the technocrats rule? share your thoughts below.
