The political divide is a bigger threat to the future of the Euro zone than financial spreads. People in the most troubled countries are rebelling against the consequences of painful reforms which are constrained by the strait-jacket of fiscal austerity. In the north, they are resenting bailouts, often seen as the unfair bill for the decade-long mistakes of distant, fiscally-irresponsible governments.
Politicians, meanwhile, are playing with fire. In the south, they blame the Euro zone or the ECB for forcing them to implement reforms. In the north, they fuel populist flames by playing on taxpayer angst. The result is that the EU and Euro zone institutions have never been so unpopular — just when they need to gather more democratic legitimacy.
Social unrest is a symptom of this deeper malaise. The decision to combine severe fiscal discipline with initially painful “structural reforms” was always debatable. It could only have been made in the isolated political atmosphere of European institutions. But to persist as economies weaken consecrates the triumph of abstraction over reason.
The EU obviously needs to be more realistic about fiscal targets and their timetable — it has already done so for Spain and Portugal. But national governments in both north and south also need to get serious on the politics of the crisis.
This requires perspective and pedagogy. Spain needs a three-year plan, not successive three-day ones. When Catalonia claims to be tempted by independence, Madrid must explain that the big bad financial markets will not always be friendly — as 10-year yields back up to the six per cent level are already showing. The government should also explain that Spain can’t ask German taxpayers to fund it at cheaper rates than California teachers or Japanese workers do - through their savings.
Up north, German Chancellor Angela Merkel still has to make a powerful case for the euro. Germany can hardly thrive if its main export markets get caught in a death spiral. These days, what happens in Barcelona depends on what’s going on in Berlin.