Politics moving to foreground of euro crisis

WORLD VIEW:DOMESTIC, TOP-DOWN and bottom-up European politics are intersecting to determine the outcome of the euro zone crisis before the end of this year. These three dimensions must all be taken into account in judging whether the single currency will survive.

Systemically this is an economic crisis of banking, refinancing and institutional deficits. But that it will be resolved politically is often underestimated in economic comment. The systemic problems faced by the euro may prove irresolvable, so that it will fragment or collapse. If not, the political will may be found to put in place a deeper institutional framework to allow it survive.

Italian prime minister Mario Monti spoke this week of a dangerous “psychological dissolution” in European politics, in an interview with Der Spiegel. “There is a front line in this area between north and south. There are reciprocal prejudices,” he said. “It is very alarming and we must fight against it.”

Such morbid symptoms are typical of periods like these. “Fourth Reich,” proclaimed Berlusconi’s Il Giornale about German demands that Italy enter a rescue programme if it is to avail of a bond-buying exercise by the European Central Bank.

Monti later had to apologise for warning German readers about a return of Berlusconi on a populist anti-EU platform if that fails.

German-Greek prejudices are the prime example of such reciprocity. Only slowly is German opinion being weaned off the framing of Greece as typical of other southern spendthrift EU member states in spring 2010.

Conveniently, this disguised private capital flows from French and German banks that funded southern spending. Official Ireland would like to be classified as a northern not a southern state in this debate, but the bailout positions us with the south and we share an interest in their battle to get direct ECB funding.

Chancellor Merkel now says the German federal elections next year will be about Europe – and the same is true of Italy and the Netherlands in the meantime.

One of the great problems the German government faces is whether its more expansive European policies are constitutionally valid, as it awaits next month’s judgment by its constitutional court on the European Stability Mechanism.

And its spokesmen bristled this week at Monti’s remarks about the need for political leaders to have sufficient flexibility to bargain about the euro’s future without being tied down by the need for parliamentary endorsement, since the court made that an explicit condition of passing the Lisbon Treaty. The appointed technocrat Monti, after all, is hardly one to talk.