Analysis - Euro debt crisis fells governments

PARIS Wed Nov 9, 2011 5:59pm GMT

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PARIS (Reuters) - As governments around the euro zone are felled by a widening sovereign debt crisis, a perceived loss of sovereignty to the IMF and the European Union is raising prickly questions of democratic legitimacy.

Since the crisis began in late 2009, Ireland and Portugal have voted out governments that requested humiliating international bailouts after their borrowing costs spiralled out of control.

Now the Greek and Italian governments are both about to fall due to the strains of having to impose austerity measures and unpopular economic reforms to avert a debt meltdown.

And Spain's Socialist government, which implemented tax rises, pay and pension cuts and labour market reforms to try to escape a similar fate, is set to be trounced this month in an early general election, all polls suggest.

Many of these changes are the result of natural wear-and-tear on long-serving governments in times of severe economic stress, or of voters punishing perceived mismanagement.

But there is now a growing feeling that political change is being imposed from abroad in the name of saving the euro.

The International Monetary Fund and European authorities have applied strong pressure, particularly on Greece, for political consensus in support of bailout programmes.

Some EU and IMF officials, and many investors, yearn for non-partisan governments led by distinguished technocrats such as former European Central Bank vice-president Lucas Papademos in Greece and ex-European Commissioner Mario Monti in Italy.

Such administrations, they argue, would implement austerity measures and free-market structural reforms in the name of objective necessity in a national emergency without bowing to vested business, political and trade union interests.

That may seem an unacceptable intrusion into the democratic right of peoples to elect their government and the right of the opposition to oppose it.

But Sylvie Goulard, a French member of the European Parliament, said the crisis had merely revealed the extent to which European countries already shared sovereignty.

INTERDEPENDENT

"We are completely interdependent, especially in the euro zone. We are no longer sovereign in the sense that many people think," she said in a telephone interview.

The crisis has shown the impossibility of trying to run a 17-nation European currency union in which each national parliament has to ratify decisions, Goulard said.

Instead of having an immediate single parliamentary session for the whole euro area to approve an increase in the powers of the bloc's rescue fund agreed in July, it took three months to complete the tortuous process in national parliaments, fuelling uncertainty in financial markets.

"We have to reverse the logic," Goulard said. "The Italians have in their hands the destiny of the euro for 330 million people. They are part of a club. The European Central Bank is buying their bonds to support them."

Countries in Asia and Latin America that went gone through IMF adjustment programmes in the 1980s and 1990s are all too familiar with the limits on economic policy sovereignty that come with the loans. But for western Europe, this has been a new and sometimes disturbing experience.

Ireland's Fine Gael party won an election in February vowing to renegotiate its EU/IMF bailout programme and make bondholders share with taxpayers the cost of rescuing ruined banks, only to be overruled by the European authorities.

However, Dublin did manage to resist strong pressure from France and Germany to raise its low rate of corporation tax.

When outgoing Greek Prime Minister George Papandreou announced last week he would call a referendum on the latest EU/IMF rescue package, he caused outrage among European leaders and panic on financial markets.

Accused of a breach of faith for failing to consult European creditors in advance, Papandreou was subjected to fierce international and domestic pressure to drop the plan, which ended up costing him his job.

"Even the idea of organising a referendum in part of the euro zone can be very dangerous. We should avoid this," Goulard said.

It was equally unacceptable for the whole euro zone to be held hostage to a faction in the Slovakian parliament, or for Germany to hold up a European summit, as happened last month, in order to consult its national parliament before reaching an agreement.

The only practical place to exercise democratic control in a currency union was in the European Parliament, Goulard said.

CRISIS OF NATIONAL DEMOCRACY?

Some politicians, notably in Italy's centre-left opposition and among Greece's hitherto governing Socialists, are attracted to the idea of a temporary government of technocrats.

That may be because they are keen to avoid the odium of having to impose pay and benefit cuts and tax rises and roll back welfare and labour rights themselves.

Olaf Cramme, director of the Policy Network, a centre-left think-tank, said national policy mistakes and a failure to explain the implications of economic globalisation to European societies lay behind the growing legitimacy deficit.

"We are witnessing a crisis of national democracy as much as of European democracy. People's trust in national governments is extremely low," he told Reuters.

"Brussels did not trigger the crisis of democracy or that of sovereignty. Pretending so both misjudges the undercurrents in popular dismay and leads to entirely wrong-headed conclusions," Cramme said.

Centre-right and centre-left parties in Europe had been converging for the last decade to the point where their policies were often indistinguishable. Both supported globalisation and the liberal market economy with only nuances of difference on the degree of social protection.

That has narrowed the space for mainstream political debate and made room for anti-European, anti-globalisation populists.

With France and Germany pushing for closer integration of economic and fiscal policies in the euro zone, the issue of democratic sovereignty is likely to become more acute.

New euro zone rules adopted last month already provide for more intrusive review of member states budget plans and surveillance of their implementation.

Since parliamentary control over taxation and public spending is the traditionally the core of national sovereignty, along with the right to declare war and make treaties, the next steps towards fiscal union are bound to be highly sensitive.

The euro zone is moving deeper into what Harvard economist Dani Rodrik calls the "globalisation paradox."

Rodrik argued in a book this year that economic (in this case European) globalisation, national sovereignty and democratic politics are incompatible. You can have any two, but not all three.

For the euro zone's debtors, dependent on international support to stay afloat, even two may no longer be assured.

(Writing by Paul Taylor; Editing by Jon Hemming)

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