There’s been a lot of discussion of this question here and there, not only related to the newly-elected president of Paraguay, but also in relation to those bishops who might have profoundly betrayed their office and call.
Today, John Allen has a really excellent (or not – see Zadok’s comment below)  overview of the question, using Lugo as a starting point, but gathering various opinions on the issue:

If the Vatican felt free to laicize bishops, it would probably already have happened several times, particularly in cases where renegade bishops have illicitly ordained priests and other bishops, thereby creating the basis for a full-blown schism. First in line might well be Archbishop Emmanuel Milingo, the Zambian faith-healer and exorcist who has broken with Rome and ordained bishops as part of his “Married Priests Now!” movement. From Rome’s point of view, however, Milingo remains a bishop and hence his ordinations are technically valid, even if the Vatican has announced that it will never grant legal faculties to the men who have been ordained.
To be sure, there are experts who take the contrary view, that a bishop could be laicized if the pope really wanted to do so.
Some point to canon 1405, for example, which gives the pope authority to judge bishops in penal cases. Given that laicization is provided for as a penalty in canon law, these canonists say, there’s no reason in principle it couldn’t be applied to a bishop, even if prudence and respect for the episcopal office counsel restraint. Others cite an 1862 rite published by Pope Benedict XIV for the “degradation of a bishop,” which seems to involve the ritual casting out of a bishop from the episcopal state. All the symbols of office, such as the mitre and pallium, are removed, and the bishop’s fingers and head are even ritually scraped with a knife to signify the removal of the anointing imparted in his ordination ceremony.

For now, the relevant point is that there’s an active theological and canonical debate inside Catholicism about the very possibility of laicizing a bishop. Saying “no” to Lugo, therefore, is not just about grinding axes or scoring political points, but also respecting the theological and canonical complexities.
To be crystal clear, none of this is intended to suggest that the Vatican’s recalcitrance is entirely innocent of political motives, or that there aren’t good theological arguments for laicizing bishops. Those questions will be the object of much legitimate discussion for some time to come.
What the current fracas does illustrate, however, is that in trying to understand why the Church does what it does, it’s incumbent upon observers to take seriously its own inner logic. Otherwise, important pieces of the picture will forever remain out of focus. Applied to Lugo’s situation, the bottom line might well be: “It’s the theology, stupid.”

 

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