The decision to have the European Central Bank buy up Italian and Spanish bonds is a huge step toward fiscal union in Europe, and it did not come easily. Last week it looked like Europe's leaders were intending to reject any such move when they announced Thursday that they would buy only Irish and Portuguese bonds. This was effectively pointless because both of these countries are already getting EU bail-outs, and the markets took it as a sign that the ECB would not buy the Italian and Spanish bonds. This caused a panic, the bond yields of those countries plummeted even faster than they were earlier in the week.
The heart of the problem is this: the markets are demanding that the EU rapidly establish stronger fiscal union so that individual states don't collapse under the debt crisis and bring the common currency down with them. Essentially, the European Central Bank needs to take on the debt of the struggling economies. But European leaders are resisting doing so because the public mood for further European integration is so low right now.
German Chancellor Angela Merkel, who represents Europe's largest economy and would therefore be footing most of the bill for buying Italy and Spain's bonds, is in a particularly tricky situation. She has the ability to put a stop to the compounding euro crisis right now if she would endorse rapid fiscal union and the EU-wide assumption of eurozone debts. But if she does so, it is virtually guaranteed that she and her Christian Democratic party will be voted out of office. When the common currency was being devised in the 1990's German voters were assured that it would not lead to fiscal union.
Yet if the euro collapses, the German economy will collapse with it. In order to save her country's economy, Merkel must do the exact opposite of what the German public wants. This same dilemma is facing the other prosperous countries of the eurozone. In the struggling economies fiscal union is unpopular for a different reason - it would mean the imposition of even harsher austerity measures on their economies.
It is this conundrum that is the reason EU leaders have only taken action during this crisis only at the times when things are just about to fall apart. With each new imminent collapse, they have taken the least amount of action possible at the last possible moment. This has calmed the market for short periods of time, but eventually the trouble comes back and the European leaders have to take that next step. This was the case for the second Greek bailout agreed last month. They calmed the market by assuring them that the eurozone bailout fund they created would be there to rescue struggling EU states. But the fund agreed was nowhere big enough to be able to do that, and it has failed to stop the contagion. Now that the debt crisis has spread to Italy and Spain – two economies that are too big to bail out – analysts are saying the only way the EU can stop the rot is to give the European Central Bank the power of a finance ministry.
Right now the countries that use the euro do not coordinate their financial decisions, they only coordinate their monetary decisions. If the ECB starts buying up the PIIGS (Portugal, Ireland, Italy, Greece, Spain) bonds at a massive scale, which analysts say is the only way to save the euro, then in return it will need to have a say over the financial decisions of these countries. The ECB would then become a defacto European finance ministry – and that is a prospect that is not popular with the voters in either Northern or Southern Europe.
The current crop of European leaders have a difficult choice to make. If they agree to Eurozone fiscal consolidation their voters will banish them from office. But if they refuse fiscal consolidation the euro will collapse, bringing about a global economic catastrophe. So far their fear of their electorates has made them rule out fiscal union, and this has only made things worse. It's food for thought for those who claim the EU has a 'democratic deficit'. In this case, it would appear there was too much democracy – or at least too much politics – behind the decisions taken to date. The big question now is who will Europe's leaders listen to over the coming weeks - the people, or the experts?