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Save the Euro, Lose Sovereignity

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The race to save the euro, and how it's being conducted, will not just affect bailed out countries' control over their budgets. It will also likely harm what remaining democratic character the Union has by allowing for influence over debtor states' votes in a way the treaties anticipate and forbid.

The euro may be saved, but these safeguards, critical to holding members accountable for their votes, will be forever lost.

The Union treaties make clear that neither one or more member states nor the Union itself can assume commitments of a member state's central government, and those provisions are being ignored. The long-term geopolitical consequence of this is the centralization of Germany's power within the eurozone by piecemeal and impromptu conditioning of bailouts that will transform an already two-track Union (the eurozone and the rest) into a multi-track Union, with each new track having different conditions of a bailout.

The short-term hazards of bailing out member states are sufficient to justify the no-bailout clause. The Union operates by member state voting. The top policy levels usually require consensus and the lower ones get by with a "qualified majority," meaning a certain number of members making up a certain amount of the population. Thus, the no-bailout clause liquidates the possibility of vote-buying by another member state or the Union, and votes are more likely to reflect the collected national interests of those voting rather than what lawyers call duress.

Also, a no-bailout clause prevents debtor state logrolling, the phenomenon where debtor states agree, sotto voce or otherwise, to vote for each other's bailout, thus creating a debtor-friendly voting bloc within the eurozone. In the context of encouraging shared responsibility for budgetary behavior, Lorenzo Bini Smaghi, a member of the ECB Executive Board, recognized this likelihood last summer, which is all the more true when there is bailout money at stake:

[G]overnments are too polite to each other, maybe in the expectation that if they find themselves being accused of the same transgressions one day, they would then benefit from the forgiveness of the others. Such a "non-aggression pact" between potential offenders tends to lift the burden of responsibility from countries and creates a form of moral hazard, which encourages indiscipline.

By ignoring the no-bailout provisions now for speed and convenience, this could emerge as a very serious longer-term problem.

Having decided that bailouts will happen despite provisions forbidding them, and given the possibility that those bailouts will be serial and with unknown conditions attached, the eurozone actually risks a ghettoization of bailed-out debtor countries, to the great benefit of Germany, the one right now driving the bailout train.

Should Germany be able to determine the fiscal policies of Greece (and/or Spain, Italy, Portugal, and Ireland), even for a limited period of time? What will be the meaning of member state voting for those bailed-out countries, whether among eurozone countries or the Union as a whole? Would they be likely to cross their main benefactor?

In the proposed bailout's current form, we may be watching the creation of a German (and Franco-friendly, for now) Bretton Woods system for the euro with Germany holding more of the cards than ever. If Germany could achieve these voting results, it would spread its influence over the Continent with its checkbook much farther, and likely for much longer, than it was ever able to achieve by force of arms.

The most sensible solution if bailouts are going to happen is that rules be set forth in advance for what conditions trigger a bailout and what conditions will be required to get the money, and that all affected member states agree on them. Remember that the list of those violating the Stability and Growth Pact is long and distinguished, and its few, weak penalties and non-enforcement have doomed its ability to justify Greece's eurozone receivership.

The rule of law requires not only fealty to existing law, but the promise of equality of treatment under it. By ignoring the no-bailout provisions, there is an increased chance of serious, unknown, and uneven remedies in addition to the creation of a regulations-for-thee-but-not-for-me eurozone of creditor member states that will far outlast this crisis.

This post first appeared on FrumForum.com.

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