In 1776, the founding fathers of the United States made a grand bargain to ensure the birth of a new republic. They agreed to sideline the new country's black population, even though the Constitution they were about to endorse proclaimed that all men are created equal. This compromise ensured approval of the constitution and the emergence of the United States, but it also left unresolved the existential issue of racial equality which would eventually light a fuse that would explode at Fort Sumter and launch the American civil war.
Likewise, the architects of the European Union launched their single currency, the euro, with a grand bargain -- currency union without a matching fiscal union. The first ever single currency zone in which monetary policy would be centrally controlled by a European Central Bank, but fiscal policies -- prudent matching of revenue and expenses, budgetary responsibility with central oversight, and the ability to intervene if a euro-zone country ran into trouble -- were left out of the euro equation. That bargain too left a festering sore -- a half-baked single currency -- and ensured a day of reckoning.
Now, with the economic collapse of Greece, that day of reckoning has arrived. The EU stands at the brink of its Fort Sumter moment.
The problems of Greece are truly Olympian. The gentleman's agreement that underpins the euro requires euro-zone countries to keep their budget deficits to under 3% of their GDP. Greece's stands at 150%. And that's just the tip of the iceberg. Tax collection systems are virtually non-existent, its infrastructure is in shambles and the unemployment for Greeks under 25 is a staggering 43%. The country's economic growth is moving backwards. Its productivity is among the worst in Europe, so its products are uncompetitive, and it is incapable of paying its huge debt or growing out of its present situation. Putting it bluntly, just lending Greece money will not accomplish much. Unless the markets sense a collective EU will to stand behind it, Greece is on track to become the European Union's first failed state.
Greece doesn't just need loans, it needs help in re-building its infrastructure, in creating jobs, it needs governmental guidance, budgetary and tax oversight. It needs a prolonged period of expensive hand-holding. Greece needs to become a ward of the euro-zone whose members must collectively nurse the patient back to health by setting up European Union level organizations not just to prescribe the medicine, but ensure that it is taken.
And that is the crux of the matter. The European Union's currency union did not envisage using the wealth of well to do parts of the euro-zone to bail out a failing euro-economy.
There is only one alternative for the EU, if it wishes to save the euro -- a progressively deeper fiscal union. The EU's success is directly related to the willingness of its member countries' to give up pieces of their sovereignty for the common European good. 17 EU countries gave up their national currencies to establish the euro. Now it is time for them to finish the job with a fiscal union.
The other alternative is to continue to transfer money from richer euro countries' taxpayers to Greece through loans with little chance of being repaid. And then stand ready to do the same for the other countries such as Portugal, Spain, and Italy, that may soon be on the EU dole. I do not believe European taxpayers from wealthy, largely northern countries will allow this to happen. When they put on the brakes it will mean the end of the euro. And what then?
The EU is the product of treaties between sovereign countries. It is not a Federal Republic like the United States was at the time of Fort Sumter. President Lincoln could rally the North with all its industrial might to help preserve the Union. A European Fort Sumter would see the EU melt away like ice on a summer's day.
The EU is arguably the most important geopolitical development of our time. The breakup of the EU would be a disaster for Europe, and for the world. Let's hope the EU's leaders use their August recess to think about Fort Sumter, and come back determined to continue on their path of an ever closer European Union.
I don't think Reconstruction is appropriate in my argument however because it implies a winning and losing side as in the Civil War. I don't anticipate there will be a European civil war. Hence my "ice melting in summer phrase", meaning the EU will just melt away with unfathomaby grave consequence. The hope is the EU will not get to the point where the fuse is lit to fire the shot.
Hold 'em or fold 'em. The only two choices left.
The irony is that Greeks are not poor or broke--just their government. Individual unwillingness to pay taxes while demanding state-funded entitlements sucked the national government dry.
A condition that is endemic in socialist nations everywhere.
:-)
The only part of your article left unsupported was this: "The breakup of the EU would be a disaster for Europe, and for the world"
I see fiscal union working the same way. in incremental steps. Incrementally giving up pieces of sovereignty, until the point of diminishing returns arrives. Note that the last EU debt meeting 2 weeks ago began to take the EU in this direction with, among other steps, a consensus at the EU level to buy debt of governments proactively in secondary markets to put a brake on their slide into trouble.
Re "disaster" think about Pres. Sarkozy's comment that because of the EU, for the first time in centuries no European country has gone to war with another for half a century (I am paraphrasing), and think about France and Germany jointly acting as the motor of Europe after all their previous (mortal) enmity, and the way countries large (Germany) and small (Poland) are able to use the EU to influence geopolitics in a way that they would be unwilling or unable to do on their own.
The second is the implicit idea that fiscal convergence means that everyone starts looking like Germany. But why? Why shouldn't Germany also look more like Greece? That's what convergence means, isn't it? I, for one, would not support a fiscal union based entirely on the German model, and having as its explicit aim the destruction of all other national models.
Greece did all right when it had its own currency. It lost its competitivity and part of its public revenues because of the Euro - and they won't come back by holding the country's hand until it becomes more Prussian. A currency in any case should be our servant, not our master. There is too much talk nowadays about how Greece should be forced to be "deserving" of its currency - the German-dominated Euro.
I see only one solution to the Greek crisis : let them leave the Euro, and force creditors to accept the conversion of a large part of their Euro debt into national currency debt in exchange for the remaining Euro component of the debt being guaranteed by the larger Eurozone countries.
Thank you for the catch.
I never stated it as a fiscal union....but that is exactly what I was talking about.
Too many different countries, with different needs and wants, cultures, languages, lifestyles, money management styles........would not make for a single, effective monetary unit.
They surprised me by it more or less working in the good times.
I guess high tide floats all boats.
Any problems were small or hidden.
UNTIL the great recession hit town.
Then all the cracks in the euro zone began to be seen.
The well built or so they thought currency wall began to leak and leak heavily quite quickly.
Simply put, these are separate countries with different ways to handle money and some do a better job than others.
The weak nations will expect bailouts from the strong ones and that arrangement won't work for long.
The strong countries will get tired of it.
Either the euro zone will disintegrate completely or only a few countries will remain while the rest are kicked out or leave.
America has its problems, the Euro zone is in for bad times, and even China is in some trouble.
I predict (unless there is something I do not know or something unexpected happens) another great depression.
The world lived on greed and crazy risking taking AND huge debt and NOW the bill has come due.