Having made the point in an earlier article (On the verge of another nervous breakdown) that the psychological behaviour of crowds can easily lead to uncontrolled generalized panics, there is also the consideration that markets in specific instances can function as decisive rational change agents, forcing issues where local politicians and policymakers dither.
For instance, if regionally the main unresolved long standing problem in Europe is how to achieve fiscal discipline in a currency union of sovereign states, an unacceptable deterioration in national finances in any or all of the union's members can lead to disciplinary market actions. If politicians haven't resolved how to maintain fiscal discipline under extreme conditions, financial markets can ultimately force the issue once crisis conditions provide the necessary opportunity by starting to impose unbearable penalties on union members.
In the process market participants can force, indeed accelerate, reform where the absence of such outside pressure would probably have delayed early institutional reform from within. So is one outcome of the global financial crisis of 2008 that Europe in 2010 is facing market actions (greatly burdened national finances creating funding problems in peripheral union members resulting in currency strains for the entire union) which force early resolution of a hitherto vexing political problem (how to partially or fully surrender fiscal sovereignty)?
The choice is between regression (limited national default eventually even leading to the breakup of the Euro currency union) and progression (achieving reform, meaning improved fiscal discipline among sovereign union members though probably still short of full political integration). Nothing precludes failure, given history. But that very (European) history also raises the ante to achieve progress rather than accept failure.
Will global markets push this issue to the very brink of forcing a European union-wide breakthrough? Could well be. The 2008 aftermath is greatly increasing fiscal burdens, and for some European countries the resulting spending, tax and debt configurations are clearly becoming unsustainable. This is the lever that speculative global players in open capital and currency markets can mobilize to force the issue. Simply bet that Europeans won't easily rise to the occasion. As bond yields start to rise as prices plummet and the Euro weakens, double the ante and double it again.
This process has been infused by great energy in recent weeks as global capital smells an opportunity for a killing. If Europe proves unequal to fight off the speculators there will either be capitulation as the Euro splinters and all go their own way (though likely as previously happened in the 1970s regrouping around a relatively sound core, with the European periphery ditched once again), akin to Britain's Sterling leaving the EMU in 1994 and devaluing heavily in the process. Or the Europeans will achieve greater sway over their collective finances through European-wide political reform by surrendering (some) of the fiscal sovereignty in favour of greater regional authority. Either way, an unresolved institutional weakness will have been addressed. Europe has a lot riding on its integration and progression as a region. Greek state finances will be reformed through stick (Greek costs) and carrot (European assistance). Portugal and Spain will also be forced to come into line, at a price. Global speculators won't go unrewarded for their pains and civic duty to force this institutional reform, provided they sell Euro on rumour and buy on fact.
Such global examples (‘case studies') are hopefully not lost on the South African authorities, when thinking in terms of foreign investor risk perceptions regarding vexing issues such as growing incidence of crime, entitlement syndromes, skill shortages and infrastructure inadequacy and the real or imagined threats of nationalization and other populist agendas.