Europe’s Greek crisis shows how it has been growing apart from the moment its members united themselves too closely
The worst thing about the European Union’s Greek crisis is the fact that seemingly no one can write an article or air a story on the whole ordeal and refrain from using the expression “Greek tragedy”. But, to be honest, the recourse to this trope is as annoying as it is understandable: much like in the Ancient tragedies to which journalists and pundits refer to in their analysis, the Greek crisis leaves the EU facing a dilemma between several uninviting choices, and no happy ending in sight.
After months of negotiations and consecutive fruitless efforts to reach an agreement for a new (third) bailout of the Greek government that would allow it to pay back what it owes to the International Monetary Fund, Alexis Tsipras, the radical-left party Syriza Prime Minister, announced last week a national referendum to be held next Sunday, to decide whether Greece should accept the terms offered by the other “Eurozone” governments together with the EU’s institutions. The move surprised everyone, and angered many. Once again, people inside the Brussels eurocracy thought, the Greek government was just trying to stall the process to buy some time and gain leverage to blame their counterparts for an ever more likely break with the Euro and even – perhaps – the EU itself.
Jean-Claude Juncker, the former Luxembourg Prime-Minister currently presiding over the EU, made sure that every Greek voter was aware that those were the stakes. Sigmar Gabriel, the leader of the German Social Democratic Party and the country’s Vice-Chancellor, reinforced the point, stating that “at its core”, a vote in the referendum would be “a yes or no to remaining in the Eurozone”. Beside him, Angela Merkel, even while agreeing those words were true, appeared to be less than comfortable with them.
A week before, German newspaper Der Spiegel ran an article detailing the brewing conflict between the German Chancellor and her Finance Minister, Wolfgang Schäuble, over Greece and how to deal with a possible “Grexit” – the only buzzword more often repeated, and more annoying, than “Greek tragedy” – with Schäuble arguing for letting Greece default and to its own, and Merkel insisting on the need to find a solution to the crisis. Many in Brussels and across the continent agree with her, believing that a Greek withdrawal from the “Eurozone” would represent a failure of the “European project”.
Such a feeling is understandable. But it is also wrong. When it comes to the Euro, the “project” has already failed. Europe began to grow apart from the moment its members united themselves too closely.
Since its foundation and before it even had the name, the EU was inscribed with the principle of “ever closer union” between its member states: its purpose was to bring into effect an ever increasing surrender of powers from the national to the supranational sphere. The founders set the goal; the builders put it in practice: in 1986, the “Single European Act” was signed between the then twelve member states. With the benefit of hindsight, it was a momentous occasion, a decisive moment. For it would lead to all the steps the “European Project” has taken since, and specially, to all the mistakes it has not avoided. It extended the number of issues under Qualified Majority Voting and established the “cooperation procedure” that gave the European Parliament more power in the legislative process. In the name of “European democracy”, powers started to be pulled away from the national parliaments (and therefore, national citizens) towards Brussels. The Maastricht Treaty of 1992 was just another step in that direction. The EEC became the EU. The European Parliament was granted new powers in the selection of the President of the Commission. An “European citizenship” was created. The goal of establishing a “Common Foreign and Security Policy” (CFSP) was set. And more importantly, decisive steps towards a common currency were taken.
The Euro was born out of a bargain between Germany and France. France would lend its support to German reunification, and in turn Germany would agree to give up its old currency the Deutschmark, and lose at least some control over its traditionally tight monetary policy. A few years after the Maastricht Treaty the criteria for which each country would be able to join the European Monetary Union and adopt the Euro were set. For instance, inflation had to be kept under control, public deficits had to be under 3% of GDP, and public debts under 60% of GDP.
Many believed that adopting the euro and the budgetary straightjacket it implied would force countries like Greece to enact a series of much needed reforms and abandon the kind of profligate state spending policies it insisted on pursuing. Unfortunately, once the single currency began to circulate, it ended up having the opposite result: in the 1980’s and 1990’s, Greece had to pay an interest more than 10% higher than Germany, but with the Euro it enjoyed similar rates, allowing its banks and governments to borrow increasingly more money that they then proceeded to waste with abandon. By virtue of sharing a currency with countries with much sounder budgetary policies, Greece was able to enjoy German-like interest rates on their government debts bonds while adopting Greek-style budgetary policies. For a while, it seemed like the best of both worlds. Without having their own central bank with the power to debase their own currency, and being committed to relatively narrow budgetary targets (while manipulating the accounts to make it look like those targets were being hit, with the helpful hand of Goldman Sachs and the willingly and knowingly indifferent “vigilance” of the EU), Greece was able to provide potential lenders with greater assurances that they would get their money back then they ever had been before.
But one day, their debt was so high that lenders began to wonder if that was actually true. To make matters worse, the EU responded to the subprime bubble burst in America by encouraging its member states to spend (after borrowing) more money to “stimulate” the economy. Instead, it stimulated nothing but fears of government defaults in those countries that were already heavily indebted.
By 2010, Greece had to be bailed out. And by 2012, it had to be bailed out again. In return, the IMF, the European Central Bank and the EU – the infamous “troika” – demands a series of reforms to the way the Greek economy operated. According to the IMF, the “adjustment” was made through “recessive channels” like reduced spending and real salaries”, instead of “productivity gains”: an ineffectual and corrupt tax collecting machine in Greece made it so that the compliance with the budgetary targets set by the troika had to be achieve through means that would end up hurting the economy and the people’s standards of living (firing public workers, cutting pensions, etc.), and the fact that some rent-seeking clienteles were entrenched within the Greek government edifice meant that governments (not only Syriza’s but also its more centrist predecessors) were reluctant to proceed with any reforms that might make the economy healthier.
The continent’s chattering classes have spent the last few months entertaining themselves by arguing over who is to blame: some argue that Germany’s “austeritarian fundamentalism” is destroying Greece, while others argue that Greece is just trying to live off other people’s money; in Greece, a radical power rose to power by protesting against austerity, while in Germany or Finland, nationalist parties get more and more electoral support because people are fed up with “paying for Greece’s sloth”. It doesn’t really matter who’s right, and the more likely event is that neither of the parties above are. What matters is that both sides exist and that their existence poses a huge problem to the EU, deriving from the way its economic and political arrangements were designed: the Greek “anti-austeritarianism” and the “anti-dependency” German or Finnish nationalists’ anger against Greece have, despite their many differences, a common source in the Euro: the adoption of a single currency by countries with such disparate characteristics as Germany and Greece meant that by the end of the previous decade, the need of countries in budgetary hell – like Greece – to devaluate their currency to even out the imbalances created by a financial crisis were incompatible with the Euro’s need to remain credible in the eyes of foreign investors; the Greek need of a working economy was incompatible with the Euro remaining a strong currency, the Greek need for a balanced budget became incompatible with a healthy economy, and the need of some form of financial transfer from the richer EU countries to bailed-out countries like Greece became incompatible with the electoral support for the governments in those rich countries.
By adopting the Euro, or at the very least by letting countries like Greece join it from the outset, the EU made it inevitable that at some point the democratic will of each of its members would enter into conflict with that of its counterparts; both would be equally legitimate, and both would be left unhappy: depending on their provenance, they either protest the lack of solidarity of the others, or complain about paying for the “lack of industriousness” of those who complain about their “selfishness”.
This is probably why the likes of Schäuble would prefer that Greece would leave the Eurozone and possibly the EU. By cutting off the single currency gangrenous leg, they would hope to restore the balance and the Euro’s full credibility with investors. Greece itself, they argue, might even benefit by this “conscious uncoupling”: by returning to the drachma and thus devaluating its currency sharply, Greece would then be able to export goods and services at a significantly lower cost to its prospective clients, thereby making those exports much more attractive than they are now and thus improving their economic outlook, perhaps compensating the drop in the value of their income that a currency devaluation would imply.
This reasoning severely underestimates several risks a “Grexit” would pose. Above all, as people like the FT’s Wolfgang Munchau and Gideon Rachman have warned, having Greece leave the Eurozone would signal to investors that at any given time, any other country might choose to do the same, thereby weakening the assumption that countries like Portugal, Spain or Italy (or worse, France) are relatively stable because they have the euro, thus weakening the confidence in their sovereign debt bonds, possibly triggering some form of crisis or possible default in them. And even if the costs of a Greek default might be as manageable as EU officials now say that would be, the same cannot be said of either the costs of defaults in those countries nor those of their theoretical bailouts.
That is why, one would suppose, Merkel and those who side with her hope for a resolution to the Greek standoff without an actual divorce. Unfortunately, that would come with risks of its own.
For example, if an agreement is reached by the EU acquiescing to some of Greece’s demands, governments like the Portuguese, Spanish or Irish ones might ask for a similar treatment, as will any government of any country that might have similar troubles in the future. Again, finding the money to save Greece might be manageable, but finding the money to bailout France or Italy (not to mention the necessary political will) will be much as harder. On the other hand, if by some miraculous occurrence the Greek government gives up and accepts their creditors’ demands, many would still harbor serious doubts about the willingness and ability of the Greek government – any Greek government – to comply with what it would have agreed, given what has happened in the last few years. Harsh measures would have to be introduced to make sure that budgetary targets would be hit, and would have disastrous economic consequences that would likely mean that, a few months from now, everyone would be having this conversation again.
Either way, the more fundamental problem of the mechanism and arrangements behind the single currency will remain. In 1997, the Nobel laureate in Economics Milton Friedman wrote an article in which he argued that the Euro would be a huge mistake: “The United States”, Friedman wrote,
“is an example of a situation that is favorable to a common currency. Though composed of fifty states, its residents overwhelmingly speak the same language, listen to the same television programs, see the same movies, can and do move freely from one part of the country to another; goods and capital move freely from state to state; wages and prices are moderately flexible; and the national government raises in taxes and spends roughly twice as much as state and local governments. Fiscal policies differ from state to state, but the differences are minor compared to the common national policy. Unexpected shocks may well affect one part of the United States more than others — as, for example, the Middle East embargo on oil did in the 1970s, creating an increased demand for labor and boom conditions in some states, such as Texas, and unemployment and depressed conditions in others, such as the oil-importing states of the industrial Midwest. The different short-run effects were soon mediated by movements of people and goods, by offsetting financial flows from the national to the state and local governments, and by adjustments in prices and wages.”
The EU, Friedman argued, lacked precisely those favorable conditions that made sense for the US to share a common currency:
“Europe’s common market is composed of separate nations, whose residents speak different languages, have different customs, and have far greater loyalty and attachment to their own country than to the common market or to the idea of “Europe.” Despite being a free trade area, goods move less freely than in the United States, and so does capital. The European Commission based in Brussels, indeed, spends a small fraction of the total spent by governments in the member countries. They, not the European Union’s bureaucracies, are the important political entities. Moreover, regulation of industrial and employment practices is more extensive than in the United States, and differs far more from country to country than from American state to American state. As a result, wages and prices in Europe are more rigid, and labor less mobile. In those circumstances, flexible exchange rates provide an extremely useful adjustment mechanism.”
Adopting the Euro, then, Friedman warned, “would have the opposite effect” of what its advocates intended:
“It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.”
Today, there are many who look at the difficulties the EU is facing and sigh in desperation for politicians like those of old who, once upon a time, were able to drive the “European project” forward – founders like Jean Monnet, and builders like Jacques Delors, François Mitterrand and Helmut Kohl. What they fail to understand is that it was precisely what these men achieved that created the problems today’s generation is unable but forced to deal with.
One way to solve this structural problem would be to create in the EU the set of political arrangements that make the monetary union in the US effective: if the EU functions more like a country, instead of a collective of nations, mechanisms that would compensate the imbalance arising from the different consequences of the same monetary policy in states with different characteristics – for example, by introducing euro-wide debt bonds, a European unemployment benefit system, and other such arrangements – might lessen some of the hardships that members of the Eurozone might find themselves in once they enter a Greek-style crisis scenario.
The powers that be within the EU seem to believe this to be the best course of action. Recently, just as conversations with Greece were about to unravel, the EU Commission presented the so-called “Five Presidents’ Report”, on “Completing Europe’s Economic and Monetary Union”, advocating the introduction a series of mechanism such as a “European Deposit Insurance Scheme” and a shared Eurozone treasury, as well as further steps in shared sovereignty between Euro-adopting countries, namely giving more power to Brussels’s authorities over national budgetary policies.
As usual, EU-enthusiasts believe that any problem within the EU will be solved by further transfers of power from the national sphere to the corridors of Strasbourg and Brussels. They fail to understand that – as Greece and the Euro crisis has demonstrated – by driving forward in their path of “ever closer union”, the more apart the members of the EU will grow from one another.
If, as things stand, German or Finnish voters are already restless with the prospect of subsidizing what they regard as “lazy” and “irresponsible” Southern countries, and voters in Greece, Portugal or Spain resent being forced to adopt “austeritarian” policies by the “selfish” Germans, imagine how the former would feel – and vote – once “Eurozone transfer mechanisms” were in place, or how the latter react to being governed even more directly by foreign institutions. Things cannot keep going like they are now. But trying to solve a problem with another step in the direction that created that very problem, the EU would only come closer to its destruction.
A few weeks after last year’s European parliament election, I was talking to a friend and, having happened such a short time before, the subject came up. I asked her how she felt about the EU. “I don’t know”, she initially replied. “I used to really believe in it, you know?”, she then began to say, “but now, to be honest, I don’t have as much hope in it as I once did.”
One can relate. There was a time when the “European ideal” meant a promise of peace and cooperation to a continent that, up until a few decades, entertained itself not with heads-of-government-all-nighters to discuss the finer points of the Common Agricultural Policy, but with constant warfare. Today, if it promises anything, no believes it.
I tried to make my case to her, arguing that the problem was not the EU itself, whose existence I welcomed and wished not to come to an end, but it having gone too far in pulling powers away from national parliaments. Afterwards, she told me I was not as much of an Eurosceptic as she thought I was.
“Really? How much of an Eurosceptic did you think I was?”, I replied. “I mean, I am an Eurosceptic, sure, but I’m not ‘anti-Europe’. I’m an Eurosceptic it the sense that I am a sceptic about politics: the more it tries to do, the less it will accomplish. From where I sit, watching everything that has happened with Greece, the Euro, and the “European project”, a healthy dose of Euroscepticism is just what the EU needs if it wants to survive.
Bruno Alves lives in Caxias, Portugal, but sometimes wishes he didn’t. He writes about politics, film and TV for O Insurgente, is an op-ed contributor to the Lisbon daily Diário Económico and a weekly commentator for its cable TV channel ETV, and has written for the American online film magazine Bright Wall/Dark Room. Bruno welcomes both writing job offers and insults at email@example.com, and you can also find him on Twitter @ba_lifeofbruno.