Wednesday, July 8, 2015

The Greek Crisis: A Potential Stepping-Stone To Deeper Integration

Over the past five years, the world has been gripped in the suspense of an unfolding drama: that of the Greek sovereign debt crisis.  As the drama has moved towards its climax in the last few months, with Greece and the euro zone countries lurching from one nail-biting scene to another, the world has continued to watch and wait with bated breath, wondering what the ultimate outcome will be and worrying about its potential ramifications for the financial markets in Europe and beyond.

Despite the repeated injection of funds by Greece's creditors, namely the IMF, the ECB and the euro zone countries, Greece's plight remains dire: the country has lost 25 percent of its GDP over the past five years, the general unemployment rate is over 25 percent and double that i.e. 50 percent among the youth.  The country has strained and groaned under the imposition of austerity measures imposed by its creditors.  In the end, on June 26, her elected leaders chose to walk away from negotiations with creditors aimed at providing further bail-out funds in return for further austerity.  There followed a referendum in which the majority of Greek voters rejected bail-out terms offered by those creditors.

The European Union now finds itself in an unprecedented situation in which one of its members may default on a $3.9 billion in bond payments to the ECB on July 20th, having already earned the dubious distinction of being the first developed country to default on a loan from the IMF.  If the July 20 payment is missed, the ECB will likely cease propping up the Greek banks with emergency loans, Greece will plunge into bankruptcy and will have to start paying its bills in IOUs, all of which will probably lead it to exit from the euro. What the effect of such an exit will be on the financial markets in Europe and beyond and consequently on the global economy, is anyone's guess.

One of the problems with a Greek exit from the euro zone (commonly termed a "Grexit"), is that the monetary union was set up as a "no exit" union, meaning there are no legal avenues for those who have joined to leave it, and yet, as a practical matter, unless Greece and her creditors can come to terms before July 20, such an exit is likely to become a reality.  Even if this happens, however, there is nothing to stop Greece from staying in the EU although this relationship could rapidly become complicated if Greece finds herself unable or unwilling to follow the rules of the single market.  In the end, there is a chance that Greece may end up leaving the European Union.  Such a departure would set a terrible and unfortunate precedent for a Union that was committed to increasing its integration.  As the Economist points out "the long-term effect of an irrevocable union being partially revoked is unpredictable." 

What then, if anything, can be done to save the European Union from unraveling?

The answer may well lie in further integration and closer unity within the European Union.  Indeed, the American experience teaches us that further integration can be critical to solving Europe's financial crisis.  Most of us forget that American began life as a fiscal mess and that one of the main drivers for moving from a loose confederacy to a tighter federation was precisely the problem of the large debts that the thirteen American states had taken on during the revolutionary war and were finding themselves unable to repay. During the war each state had separately borrowed heavily from foreign powers. After the war, the states found themselves unable to repay what had become enormous debts.  The Confederation was hamstrung and unable to help, because it lacked the power to impose taxes and most states were not paying their share of assessments to the confederate government -- a condition that is familiar in the context of the European Union today.  Within the context of the American experience, the problem was further exacerbated because the states were printing their own money at will. The flood of paper money produced wild inflation in American economies.  The only solution was to move towards greater unity and integration by creating a federation with a central government capable of levying federal taxes that it could use to repay the foreign debts, or else risk disintegration.

The parallels with the EU's current dilemma are striking! One of the problems the European Union currently faces is the resistance by its member states to mutualizing liabilities, especially in the absence of mutualized responsibility, for example by being able to raise European-wide taxes to fund bail-outs or the ability to have shared decision-making over budgets, taxes and pensions in the first place.  As eminent economics experts have said, the crisis in Europe is at root a deep constitutional and institutional one rather than one of funding.  The real solution appears to lie in Europeans taking a quantum step toward deeper economic and political union which requires an acceptance that its member states must be willing to cede more sovereignty.

The insistence by EU countries on clinging excessively to sovereignty in the face of the suffering and chaos it is causing them individually and collectively, is not sensible.  Surely, policies and theories of how we organize ourselves as peoples and nations are there to serve our best interests and to lead to our well-being.  If they have ceased to do so and are patently injuring us, is it not time to reconsider and adjust them?  In this instance, giving up a modicum of sovereignty in accordance with clear rules, backed by collectively-created and shared enforcement mechanisms and agreeing upon sanctions for non-compliance that are applied even-handedly to all member states, may well go a long way to relieving the European Union of its current suffering and the Greeks of their plight.  While today it is the Greeks who suffer,  who is to say that in the absence of necessary reforms to the system, tomorrow other European countries like Spain, Portugal, Ireland or even France may not follow in its wake?

It was such a recognition that led the thirteen member states of the American confederation to take the momentous decision to fuse their interests by moving from a confederation to a federation, in which certain limited powers that affected their collective interests were delegated by them to a central government, while remaining powers were retained by the states themselves.  The Europeans might do well to examine closely this historical precedent that has resulted in the creation of a strong, unified country that overcame its debt problems and consider following suit by applying the adopting the principles of federalism to the European Union.  There is still time to use the Greek crisis as an opportunity or stepping stone, to create a watershed moment in the history of the European Union, one in which the obvious vulnerabilities of the common currency are recognized and addressed by taking swift, effective and unified steps to strengthen the EU by taking the next step towards creating a United States of Europe, as envisioned by Winston Churchill in the aftermath of the Second World War.

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