Sometimes you can't have both: democracy and the euro

There is a fundamental tension between democracy and the euro that is playing itself out in the South of Europe today. Daniel Oliveira of the Portuguese newspaper Expresso wrote this week that Portugal is being treated like a colony by the North, where the wishes of the people are being steamrolled, and the democratic and constitutional rule of law is being disregarded.

There is some truth in that statement, now that Portugal's public finances have reached a breaking point. The same is true for Greece. But it isn't the entire truth. The other half is that Portuguese and Greek voters supported joining the euro, which they probably shouldn't have done. They wanted to join, but not pay the price in terms of budget restraint, which means they were not being honest with themselves or the rest of the EU about what they really wanted.  They could have easily joined a different kind of euro with no negative implications for their democracy, one that did not insist so urgently on tough budget criteria. But that is an entirely different universe from the one in which we live, and it is unlikely that a 'soft euro' would have been a success. A euro without Germany or France? Unlikely. They saw it as necessary as a matter of pride and status, of really belonging to Europe. Now, instead of pride and belonging, they have disgrace, humiliation, and relegation to third-rate status within the EU. They are far behind the emerging markets of Eastern Europe and will stay there for a long time.

In theory, what the Portuguese will have to accept is that getting democracy back as quickly as possible means leaving the euro. That is not an easy way out either. The Portuguese government owes a lot of money in euros. Once Portugal re-introduces a national currency that devalues, the value of the national debt compared to the government's ability to pay with debased currency will skyrocket. Portugal will have no choice but to default on its debt. International investors will turn their backs on the country until yet another political leader is elected who wants to satisfy international financiers. And the problem will be back.

The European Commission has always been a strong proponent of countries joining the euro as quickly as possible. In the case of Southern Europe, they encouraged willing governments. In Eastern Europe, which largely was not desperate to join, the Commission resorted to ugly and ill-advised threats to cut EU funding to national governments in April 2004. They, in turn, having just shed Soviet imperial rule, rejected those threats as outrageous, illegal and undemocratic. The Commission's policy toward rapid euro accession needs to be thown out the window re-thought, at least as long as we have the kind of euro we have, which is for the foreseeable future. Without fiscal transfers; without an economic government for Europe, it cannot work. The euro, and the consequences of membership, do not exist in a vacuum.

It isn't the tension between the euro and democracy per se that is playing itself out, but that the colliding wishes, interests and values of certain euro member states make democracy and the euro incompatible. Either everyone adopts the same culture and values, or someone's democracy has to die. Europe has already decided what limits on democracy are compatible with euro zone membership.

So, Portugal and Greece, what will it be? Democracy or the euro?

You can't have both.