First, experts tell us that the Euro-zone problems caused by Greece and Italy are different by those caused by Spain, Portugal and Ireland. The economic crises in the latter three countries are basically due to the effects of the EMU creating low rates not only in Germany but in the entire Euro-zone. Low rates mean cheap money and that has meant property bubbles. Once they burst, the economies of Spain, Portugal and Ireland were thrown into a deep recession.
So the question here is if creating a European monetary zone was a good idea if the national economies are not (or cannot be brought) in tune.
Greece and Italy are different creatures altogether. Here the fundamental problem is that the countries lack good economic governance. This is putting it mildly: We could also say that the political economy in both countries rest on clientilism and that neither country has a functioning tax system. There are degrees of Hell here: Greece is probably in a worse state than Italy while the Italian economy for obvious reasons are much larger than the Greek.
So the question here is why the two countries were admitted to the EMU in the first place? Political prestige – both on the side of the EU and the individual countries – has a lot to do with it.
Second, what do you do when you find yourself in quicksand up to the neck? The issue here is that the creation of the EMU and the adoption of the Euro in PolSci lingo is path dependent: Getting in may be difficult and expensive but the costs of leaving may be almost prohibitive both politically and economically. Which goes a long way towards explaining why European leaders face some major problems in finding a solution to the Greek (and Italian) mess.
But wait: It gets worse. Remember that political leaders operate on multiple levels – the European and the national. So long as political leaders can and will deliver on the agreements made on the European level, negotiations are complicated. European leaders know and accept that agreements may be due to national votes (or in some cases referendums) and this is more or less elegantly taken into account at negotiations.
But what happens when a national political leader throws a bomb and announces a referendum after an agreement has been reached? This is changing the rules during the middle of the game and more than likely to make other EU leaders angry, disillusioned or both. There may – theoretically – be a rationale on the national level: Papandreou is effectively facing a vote of no-confidence in parliament and could react by taking his case to the nation.
The problem here is that referendums are usually extra veto points, especially when we are dealing with measures that are unpopular with the electorate (We will leave aside that the Greek economic policy has been unsustainable in the long run: The Greek electorate are not exactly used to having to relate to responsible economic policies). If – as we expect – he loses the referendum, he will be dead politically and the hope of Greece gaining a stronger position at a renegotiation (which I would suspect will motivate a lot of Greek voters) looks rather unrealistic. And even if he wins the referendum, Papandreou is likely to be met with suspicion in Brussels – after all, he was the man who changed the rules of the game during the previous match. How can we be sure that he will not engage in another round of match-fixing the next time?
And in the meantime, time flies and if there is anything the Eurozone does not have then it is time. If Papandreou sticks with his plan, we should expect speculative attacks against the Euro – and to be perfectly honest, I would also expect rounds of shenanigans from the Italian government. All stuff designed to undermine economic stability in the Eurozone.
Very bad news indeed. We may need the Marx Brothers for relief.