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Opinion: Eurozone crisis will bring down governments

Leaders of Ireland, Portugal, Spain and Italy will be clinging to power in 2011.

Irish demonstrators
Demonstrators hold placards and a giant banner outside the Irish Parliament in Dublin, on Dec. 15, 2010. (Peter Muhly/AFP/Getty Images)

NEW YORK — Europe’s Waterloo will not occur during 2011. The eurozone efforts to tamp down the sovereign debt crisis have been deficient, but not yet suicidal, with just enough bluff to maintain the bloc’s integrity for at least a year.

A day of reckoning looms not far ahead — economists at my firm, Roubini Global Economics (RGE), forecast the possibility of a complete eurozone breakup in the years 2013-2020 at 45 percent. But the surprising resiliency of governments in Greece, Ireland, Portugal, Spain and Italy during the summer of 2010 is deceptive. Their survival stems from EU policies that dialed back rather than defused the sovereign debt time bomb.

But the region’s politicians don’t have the fudge-making capabilities of the European Central Bank or the IMF, which backed earlier bailouts, at their disposal. For these European governments, austerity is a current fact of life, and it is making their lives (via the lives of their constituents) miserable.

Here’s a look at what 2011 will hold for key European governments:

Eireann goes broke: The debacle that tilted Ireland into the bailout bin along with Greece now appears likely to remake its domestic politics, with the governing party, Fianna Fail, paying a sharp price for leading the country through (and, many voters will note, into) the crisis. The Green Party, which stayed in the governing coalition until November, may also suffer the taint even now that it has bailed out.

Meanwhile, Fine Gael, Fianna Fail’s traditional rival, along with Labour and the nationalists of Sinn Fein, have all benefited. Each has a shot of leading a coalition after the next election, and each would be under intense pressure to increase taxes on corporations (the source of Ireland’s main competitive advantage within the eurozone), as well as increase social welfare spending. Foreign corporations based in Ireland could well bolt if the changes tilt the playing field in favor of larger eurozone economies.

Iberian tremors: After Ireland’s collapse, global bond traders shifted their sights to Portugal, Spain and even Italy. In Portugal, Prime Minister Jose Socrates, in power with his Socialist Party (PS) since 2005, has launched a last-ditch effort to stave off what many economists see as an inevitable move toward a bailout.

Increasingly, Socrates’ government survives on the willingness of his main opponents, the conservative Social Democratic Party (PSD), to abstain in key votes. Ahead in polls, only the unpleasant prospect of having to govern a nation on a collision course to bankruptcy seems to be keeping the PSD from forcing new elections.

Meanwhile, it’s increasingly clear that markets have priced Portugal as “road kill” on the eurozone sovereign debt juggernaut’s road toward Spain. Unlike Portugal, Spain’s economy is both too-big-to-fail and too-big-to-bail-out.

The effects on Spanish politics, so far, are predictable: Faced with “barbarians at the gate,” many Spaniards — even across bitterly drawn party lines — have rallied to the flag. This means blaming international speculators in the bond markets for Spain’s woes rather than local causes. While this provided a bit of respite for Prime Minister Jose Luis Rodriguez Zapatero and his Socialist minority government, which is dependent on nationalist parties for its survival, the holiday won’t last.

On Nov. 28, voters in the Catalonia region — which Zapatero’s minority government relies on for its survival — ousted his Socialists from the provincial government. While national parliamentary elections are not due to be called until 2012, leaking alliances with regional parties and polls showing the conservative People’s Party of Mariano Rajoy well ahead suggest early elections. Rajoy has been assiduously courting both of the regional parties, offering concessions over the distribution of local tax revenues in their wealthy regions.

Rajoy’s rise would be welcomed by business as he has criticized the slow pace of labor market and other reforms, but he would also be likely to seriously increase cuts in state spending, with short-term downside effects on Spain’s already high jobless number and growth rates.