When the democratic/popular backlash occurs, it takes the form of rejection of international/cross-border political commitment mechanism. Voters are surprisingly discerning. Opinion poll data shows a major increase in hostility to the EU in peripheral countries, but with no corresponding unpopularity of the common currency. Hostility to the EU is also evident in parliamentary elections results in Greece and Italy.
The trilemmas are worse in the recent context because of the absence of an escape clause. In the absence of an exchange-rate option, there is a need for greater debt reduction, but that raises a politically awkward question of the distribution of losses between the private and the public sector.
The result is reminiscent of the interwar political debate about whether (mostly American) private creditors or (mostly European) official reparations creditors should have priority in the payment of German debts. What made the interwar slump so intractable was that it was not just a financial issue, but also a crisis of democracy, of social stability, and of the international political system. In the interwar period, increased social tension as a consequence of increased unemployment and of widespread bankruptcy made normal democratic politics impossible. Domestic political pressure also became a source of heightened international tension.
That is true in today’s Europe. Democracy has become a central target of complaints by the European elite. Luxembourg Prime Minister Jean-Claude Juncker and former euro group chair stated that it wasn’t that European leaders didn’t know what the right policies were; but that they didn’t know how to be re-elected after they had implemented them. The 2013 Cyprus crisis and its resolution exposed two new dimensions to the clashes over Europe’s debt and bank crisis. The discussion of a levy on bank deposits, and whether small customers should be exempted, puts class conflict at centre stage. The question of foreign, and especially Russian, depositors – along with the proximity to Syria - makes the incident into an international relations problem.
Supranational commitments however do not change the problems posed by the adjustment requirement, and the asymmetric character of crisis adjustment is more apparent in the modern era (and in the interwar experience) than it was under the classic gold standard. A design that intentionally excluded a contingent clause made the system at first apparently more robust, but aggravated the eventual adjustment issue. That is why the initial crisis may not have been so acute as some of the gold standard sudden stops, but the recovery or bounce back is painfully slow and protracted. The instability is increased by the heightened complexity and length of credit chains, and by the fact of the mediation of credits through small country banking centres.