The U.S. is not Greece, nor even the European Union, but we should care about the eurozone crisis. (More)
The EU and Greece, Part I: What It Isn’t
This week Morning Feature looks at the European Union, Greece, and the ongoing eurozone crisis. Today we discuss what the crisis is not: a small-scale model of the U.S. future. Tomorrow we’ll explore what the crisis is: a predictable and perhaps inevitable stage in the EU project. Saturday we’ll conclude with what the U.S. should and should not do as the challenge evolves.
“Going the way of Greece?”
Sometimes it’s just a city, like Detroit. Sometimes it’s an entire state, like California. And sometimes it’s the entire U.S. portrayed as going the way of Greece.
The story, as usually told, is that you have to pay your bills as you go. If you go into debt, sooner or later you have to pay the pipers: the people who lent you money. They now own you. Such is the case in Greece, the story goes, and such will be the case in Detroit, or California, or the entire U.S. Unless we stop spending money we don’t have … our grandchildren better learn to speak Chinese.
Oh, and by “spending money we don’t have,” the storyteller usually means money spent to help lazy, darker-skinned people who don’t pull their weight:
Sarrazin constructs an opposition between an efficient Northern Europe and a chaotic South – between workers and layabouts, and whites and dark-skinned people. He refers to countries which he claims behave irresponsibly as “Club Med” states.
Thilo Sarrazin’s previous book – Deutschland schafft sich ab (“Germany is self-destructing”) – railed against immigration with claims that Muslim immigrants lack “the desire to integrate” while “costing the state too much.” In his new book – Europa braucht den Euro nicht (“Europe does not need the Euro”) – the former International Monetary Fund and German Finance Ministry official rejects the notion that hard-working Germans should subsidize lazy Greeks, Italians, and Spaniards.
Surface Similarities …
Sarrazin’s rhetoric might come from a Tea Party rally, and former Federal Reserve Chairman Alan Greenspan voiced a similar view of the eurozone last October to CNBC:
At the outset of the creation of the euro in 1999, it was expected that the southern eurozone economies would behave like those in the north; the Italians would behave like Germans. They didn’t. Instead, northern Europe fell into subsidizing southern Europe’s excess consumption, that is, its current account deficits.
The effect of the divergent cultures in the eurozone has been grossly underestimated. The only way to have several currencies from divergent nations lumped together is if they are culturally close, such as Germany, the Netherlands and Austria. If they aren’t, it simply can’t continue to work.
Yet that story conceals as much as it reveals, as Time‘s Michael Sivy noted:
Germany might seem to be the good European in this whole affair, having given up its stable Deutsche Mark for the sake of continental unity and then paying a disproportionate share of the costs whenever things go wrong. But it too was primarily motivated by economic logic. Germany and a few other Northern European countries, such as the Netherlands, are hugely successful exporters. For them, keeping unemployment rates low requires steady export sales – and that’s very difficult if their currencies appreciate.[…]
Germany’s clever solution was to tie itself to weaker economies through the Euro, which prevented the currency from appreciating too much. In effect, Germany was subsidizing Italian, Spanish and Greek consumers so that they could buy expensive German products, thereby preventing layoffs at German manufacturing firms. This made great sense as long as the cost of propping up weaker economies wasn’t too big. But now, Germany is facing the prospect of huge, open-ended payouts that will greatly exceed the economic benefits.
The story of the eurozone collapsing because industrious Germans were forced to support the “different culture” of southern Europe is like the story of the U.S. housing market collapsing because bankers were forced to offer too-risky loans to “irresponsible homeowners.” German businesses made money selling German goods to “Club Med,” just as banks money selling loans they knew would soon have to be refinanced (and bring in yet more fees). When the bubble popped, in each case, the ‘makers’ blamed the ‘moochers’ … from whom those ‘makers’ had profited nicely.
… and Structural Differences
But the U.S. is not Greece. At about $300 billion, the GDP of Greece is about the same as that of Maryland. And while the EU has a slightly larger GDP than the U.S., again that statistic conceals more than it reveals. Simply, the U.S. is politically and economically integrated in ways the EU has not yet achieved.
Consider for example the idea of eurobonds – equivalent to our U.S. Treasury bonds – proposed yesterday by newly-elected French President François Hollande. German Chancellor Angela Merkel rejected the eurobond idea, saying they are forbidden by EU treaties and will not encourage debt-laden countries to balance their budgets. Contrast that legal and economic structure of the U.S., where the wealthier states subsidize the poorer states through a variety of federal programs … many of which are funded through those U.S. Treasury bonds.
As we’ll see tomorrow, the EU compares more closely to the U.S. under the Articles of Confederation: lacking a central government with the legal authority to mediate conflicting state interests and enforce national solutions. But again, there is an important difference. The EU formed not after independence from another sovereign, but to avoid repeating the horrific tragedies of two world wars, as British Deputy Prime Minister Nick Clegg warned on Monday:
You have to have something which creates a fiscal accompaniment to monetary union.
Whilst I have a huge amount of sympathy with German taxpayers and German politicians who are reluctant, understandably because Germany is the paymaster of the European Union, to entertain these ideas, I fear that they are unavoidable.
It is not sustainable to believe that the eurozone can thrive through fiscal discipline alone – it also has to, at some level, include an ability to either share debt or to deal with shocks in one part of the system or the other through fiscal transfers.
This cannot carry on, because the combination of economic insecurity and political paralysis, we know this from the history of our continent, is the ideal recipe for an increase in extremism and xenophobia.
The EU unraveling could have devastating consequences worldwide, and not only for economic markets. The U.S. is not Greece, or the EU, but Americans should still understand and care about what happens over the coming months.