The Real European Question: Greece, the Euro, and a More Perfect Union

Many of us have spent more time than we can really afford, trying to figure out the Greek debt crisis and what it means. Who owes money to whom, how the Greeks got into the mess they’re in, how the Irish and Portuguese, who once appeared to be in just as bad a mess, apparently climbed out of the hole they were in, and whether Italy and Spain, both much larger and more important economies, are also going to get sucked into the vortex of debt and possible exit from the Euro.

Consider too the possibly widening cracks in the alliance of creditors. The IMF has just, not a moment too soon, announced that some form of debt relief for Greece is essential if the country is ever to escape the trap it is in, but the most that other creditors, especially Germany, will agree to is a rescheduling of debt repayments, even though it has now agreed to negotiate a new bailout package worth €86 billion.

The press often depicts the Greek crisis and Germany’s reluctance to forgive any portion of Greek debt as an Aesopian morality play: the virtuous Northern Europeans (the ant) and the feckless, profligate Southerners (the grasshopper). The narrative often refers to Germany’s hyperinflation of the 1920s and its role in bringing the Nazis to power as explanation, if not justification, for its current posture of fiscal rectitude. The narrative ignores the debt relief offered to Germany in the early 1950s, which helped ignite its economic miracle of the next several decades. It also ignores the estimated $2 trillion cost to West German taxpayers of German unification, which included buying up Easterners’ Ostmarks at anything from three to 10 times their actual value.

It is striking, though misleading, that only a sliver of Greece’s debt – around twelve to thirteen billion dollars out of a total of more than $350 billion – is owed to private creditors, mainly Greek and foreign banks. It is misleading because about €150 billion of the previous bailout from the “troika” (the IMF, the European Central Bank, and the European Union), which began in 2010 and has so far amounted to more than €250 billion, went to Greek and foreign (mostly European) banks that had lent to Greece during its borrowing spree, which started with the introduction of the Euro in 2001 and came to an abrupt halt with the financial crisis of 2008.  Those banks were never required to take a haircut on their bad loans, and despite the belated realism of the IMF, the ECB and EU members aren’t keen to take one now.

It took Germany’s economy the better part of two decades to recover fully from its expenditure on reunification and it is understandable that Germans would not now be keen to bail out the Greeks, who don’t share a common language or history. But that is precisely the real European question.

The European Union, by almost any measure, has been a stunning success since its beginnings in 1951 as a common market for coal and steel comprising West Germany, France, Italy, the Netherlands, and Belgium. It has never been purely or even mainly an economic project. French Foreign Minister Robert Schuman, who first proposed the idea, declared that the real purpose of the Community was "to make war not only unthinkable but materially impossible" by means of regional integration, especially between Germany and France, and the past 70 years of peace, following three major European wars in the preceding 75 years, have proven the soundness of that vision.

Subsequent enlargement of the Community, and expansion of its scope, may have been sold to voters on economic grounds, but political integration has always been at the top of the agenda, whether explicitly, as in the 1992 Maastricht Treaty that set the European Economic Community on the path to becoming the European Union, or implicitly, as Britain’s admission in 1973, which existing members, especially France, supported because bringing in another large economy, especially one that promised to be a net contributor to the budget and agriculture subsidies, might potentially revitalize the slowing EEC economy.

When Angela Merkel, in a speech to the German Parliament in September 2011, declared, "The euro is much, much more than a currency. The euro is the guarantee of a united Europe. If the euro fails, then Europe fails," she was stating what everyone already knew, even if the Greeks subsequently took it to mean that in any bailout showdown the Germans would always blink first.

So the real European question is not whether Greece should be granted further bailouts, and at what price. It is really whether the European project will survive, and this may depend in turn on whether Germans and Finns, among others, will agree that preserving the union is worth paying for in the form of an open-ended commitment to bail out economically weaker members.

This outcome is far from certain, even if  Greece and its creditors reach an agreement that allows it to remain in the Eurozone.  The EU is under threat from many quarters. Britain, which has always been of two minds regarding membership, has sought to negotiate “opt-outs” from many EU policies and regulations and to delete references to “ever-closer union” from EU treaties, while David Cameron’s government has committed to an in-out referendum on Britain’s membership, to be held in 2016 or 2017.

Populist and anti-EU parties on both ends of the political spectrum have won increasing numbers of votes and Parliamentary seats in several countries, Hungary’s Prime Minister has expressed skepticism towards liberal democracy, and it is not inconceivable that Marine Le Pen might lead her anti-EU National Front to victory in France’s 2017 Presidential election. Russia, trying to regain its status as a great power, probes for weakness by offering economic enticements such as cheap energy to some countries and making barely veiled threats to the sovereignty of the Baltic states and peripheral EU members in its former sphere of influence.

The early experience of the United States is possibly instructive. Following the Declaration of Independence in 1776 the Continental Congress drafted the Articles of Confederation, which by 1781 had been ratified by all 13 states. The Articles provided for a pretty loose arrangement: the Continental Congress could pass laws, but their ratification required unanimous agreement by all 13 state legislatures. The executive branch of government consisted of a “Committee of the States,” authorized  “to appoint such…committees and civil officers as may be necessary for managing the general affairs of the United States under their direction.” In practice only the states had any enforcement powers. The Articles gave Congress the sole right to coin and print money, but by 1786 the Continental dollar was worthless. Congress could borrow money but couldn’t pay it back. States were supposed to pay taxes to the Confederation, but no state paid all its taxes and some paid none at all. States felt free to respect or violate international treaties entered into by the Congress. With the fledgling republic threatening to break apart, the Congress convened a convention to "render the federal constitution adequate to the exigencies of government and the preservation of the Union.”

The Preamble to the new Constitution reads, “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

Ratification of the U.S. Constitution did not fully resolve the question of states’ rights versus the powers of the Federal Government. The Union descended into a bitter civil war over the Southern states’ insistence on preserving slavery and extending it to newly admitted states. That conflict persisted well into the 1960s, as Southern states defied Supreme Court judgments and Executive Orders mandating an end to racial segregation, and even today a number of states are looking for new ways to defy Federal laws and judgments that affirm rights to abortion and gay marriage. These, and similar, conflicts will persist as long as the U.S. maintains a Federal system of government. But, notwithstanding Texas’s periodic threat to secede a second time, the composition of the Union and the balance of powers between the Federal Government and state governments are largely settled. Few mainstream politicians question the legality or necessity of Federal taxation and of transfers, via the Federal Government, from richer states to poorer ones, even if the amounts and nature of those taxes and transfers are vigorously contested. No one has suggested that highly indebted states should lose the ability to transact their business in U.S. dollars, even if those states may face a higher cost of borrowing than more prudent ones. U.S. politics may be dysfunctional in many aspects, but its political and monetary union is not going to dissolve over, say, the $127 billion the State of Illinois owes to various creditors, even as the quality of public services in that state declines.

Europe’s current situation is similar to that of the United States under the Articles of Confederation. The EU, as an association of sovereign states, is at a point similar to that of  the U.S. when it convened the Constitutional Convention. The people of Europe will have to agree to closer integration – Federal system of some kind – if the EU is to remain intact. Greece’s exit from the Euro, if it happens, will not itself kill the EU, but it would set a precedent that would make it more likely that other countries – Portugal? Spain? Italy? – would find it easier to follow suit, the unthinkable having become not only thinkable but, at least in the near term, preferable to continuing austerity.

It would be ironic if the Euro, intended as a mechanism for closer integration, became the wedge that splits the union apart, but without further political and fiscal integration it may soon become inevitable.

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