Political firewalls

Detroit bankruptcy has lesson for the Euro zone

A regional government without its own currency gives up in the face of intractable financial problems. The politicians in Nicosia and Athens already have some painful experience in begging for help, allocating pain and trying to create a sustainable arrangement. Detroit, which declared bankruptcy on Thursday, is just beginning.

Motown is in worse shape than Cyprus or Greece. However, the municipality and the Euro zone member nations have a lot in common. Investors were too kind to all of them for too long. They were all mismanaged. In each case, the law is unclear. They can all expect some aid, although the relevant authorities - whether in the Euro zone, Washington or the prosperous suburbs of Detroit - are grudging.

There is one key difference. Each and every Euro zone sovereign crisis is considered existential for the single currency, while no one thinks that the collapse of Detroit will have any effect on the strength and global status of the dollar. No number of American local or state defaults would shake that complacency.

There are financial reasons to worry more about euro crises. Since individual taxpayers hold most American municipal bonds, US sub-sovereign failures are unlikely to hit the banking system. In the Euro zone, banks often own a big portion of their sovereign's debt. The experience of Cyprus, where the rot did not spread from the nation's brutally restructured banks, is only a somewhat encouraging precedent.

But the main explanation for the absence of a Detroit-triggered currency crisis is political. Detroit will not leave the dollar zone, or be expelled. The budget-balancing governor of California will not fly to Michigan to give moralistic lectures about the importance of paying debts, as the German finance minister just did in Athens. The euro zone remains a group of bristly nations, while the states of the United States have no financial sovereignty.

Euro zone leaders should take note. By all means, work on the details of rescue mechanisms and banking union. But none of this will work without strong political commitment to the single currency. And, with enough support, even the bankruptcy of once great members could be contained.