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.

The Dueling Forces of Integration and Fragmentation

That the world is being buffeted by storms of severe crises is not news even to the most casual observer of the international scene.  Chief among these are the financial crisis in Europe, which threatens to slow down economic growth worldwide, the environmental crisis as reflected in global warming and climate change, the looming food and water crises and the crisis of international security which encompasses issues of nuclear proliferation, human rights atrocities and acts of terror to name but a few.

What is more interesting and worth examining is the increasingly common reaction to these crises by peoples across the globe as reflected in their drive to separate and take refuge in fragmentation, all in the mistaken belief that independence will afford them more control of their own destinies, and will save them of the dangers of going down with the sinking ship of a larger country or region to which they belong. 

Looking at Europe alone, one is struck by the increasingly strident movement towards separatism as witnessed by the desire of the people of Flanders for further autonomy, the movement by the Catalans to gain independence from Spain and the drive by segments of the Scottish population to break away from the United Kingdom as reflected in the Edinburgh Agreement just signed between British Prime Minister David Cameron and Alex Salmond, the Scottish First Minister setting the terms for a Scottish referendum on the subject of independence to be held in 2014.  

The arguments that are offered in all three cases center on two main themes.  The first theme stems from the resentment of people in these regions who are relatively wealthy compared with the rest of their respective countries and who perceive themselves to be more hard-working, that their wealth and hard work are being exploited to support their poorer and/or lazier compatriots.  They resent being required to pay more in the form of taxes,  to give up revenues from their natural resources and to carry a large share in the debt of the larger countries to which they belong. 

The second theme rests on a strong desire to have decisions on fundamental policy questions be made by the people who are closest to and most affected by the decisions, rather than by distant institutions that are perceived as being out of touch with the needs of a particular group of people and that tend to apply a uniform policy to all without taking important differences into account.

One can see that what seems to lie at the root of these arguments is a genuine and legitimate desire on the part of people everywhere to have a reasonable say in the crafting of their own destinies.  This is a theme our times as reflected in the wave of nations participating in what has become known as the Arab Spring.  The sensible question to ask then is: in what instances is centralization a boon and when does it become out of touch with the grass roots and therefore oppressive and unfair?  The next question is: how can we craft a system of government that allows people to consult upon their legitimate needs while at the same time working towards unification?  For we face a real danger that in our rush towards fragmentation as a perceived panacea for solving all difficulties, we will set off a chain reaction of increasing fragmentation into smaller and smaller parts without a well-designed link between the parts.  How much fragmentation is enough?  How small must the units be for people to feel secure and feel that they have a voice in their own destiny?  One can see that if left unchecked, this process can easily degenerate into an avalanche of greater and greater fragmentation and balkanization generated and fed by fear.  In a world in which interdependence is a fixed reality, this will only lead to conflict and despair.

Might not the real solution lie in deeper integration both in Europe and indeed in the world?  Such integration would signal a further step in the process of maturation of humanity as a whole.  Having evolved from a societal system comprising small but increasingly growing loyalties to clan, tribe, city-state and nation, isn't the next natural step in our societal evolution the creation of a federated superstate in which each individual embraces a larger loyalty that is entirely compatible with the lesser loyalty to her nation state?  Such a federated state can and should be designed to meet the legitimate needs of individual populations, granting them autonomy over many issues of particular concern to them while also guaranteeing the good of the whole by requiring that the federated parts cede certain rights to decision making to the federal government.  These latter rights should sensibly include the right of individual nations to make war on each other, relying on a central army serving the whole to maintain the peace, the right to manage critical natural resources including energy resources for the benefit of all the people of the world, thereby eliminating conflict and inequality of access to sources of energy, and certain rights to taxation in order to raise funds to tackle global problems such as global warming.

If we need a model or blueprint to guide us in undertaking such a vital and bold experiment, it is worth examining the federal system of the United States, which appears to have been relatively successful both in balancing the needs of the whole with the needs of the individual parts and in inculcating the principle of unity in diversity in its workings.