The future of the eurozone doesn't depend solely on decisions taken in Nicosia or Frankfurt, writes Nixon in his WSJ column. It depends on what lessons voters and politicians across the eurozone draw from the Cyprus debacle.
Political risks have always been the eurozone's Achilles' heel. The survival of the single currency depends in large part on national politicians recognising that, under the terms on which the euro was created, sovereign states are responsible for their own affairs.
For better or worse, the eurozone wasn't established as a European superstate: there was no appetite for that 15 years ago and there is little today. Instead, there was an expectation that the single currency would compel governments to manage their economies responsibly; there was even a hope that by removing from politicians the temptations to devalue and print money, the euro would bring an end to decades of inflation and currency instability in Europe's periphery, ushering in an era not only of prosperity but better governance.
Of course, it hasn't worked out this way: currency stability bought abundant capital flows to the periphery, which created the illusion of prosperity but only entrenched political elites riddled with cronyism, bureaucracy and corruption. Politicians—and markets—turned a blind eye to mounting imbalances and the accumulation of what have become unsustainable debts.
Now national politicians are having to address those imbalances and debts against the backdrop of a deep financial crisis. The result is politics in its rawest and most brutal form: elected officials are being forced to decide how the costs should be borne among their fellow citizens.
So far in the euro crisis, politicians have ultimately accepted this responsibility including, after a fashion, in Greece. Then came the crisis in Cyprus...
As they watch the country's largely self-inflicted disaster unfold, the lesson should be that in the European monetary union, sovereign states are indeed responsible for their own debts, that unsustainable debts must be restructured since they can't be inflated or devalued away, and that the only responsible role for politicians is to fairly apportion the losses and take the necessary steps to ensure the longer-term health of the economy.
Is this the lesson that is actually being drawn? That's far from clear.
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