Louisa Gouliamaki/AFP/Getty Images
Greek Finance Minister Evangelos Venizelos talks during a press conference in Athens on March 9, 2012. Greece is seven billion euros short of a targeted debt cut of 107 billion euros ($142 billion) after a successful bond swap with private investors on Friday, Venizelos said.
Greek Finance Minister Evangelos Venizelos talks during a press conference in Athens on March 9, 2012. Greece is seven billion euros short of a targeted debt cut of 107 billion euros ($142 billion) after a successful bond swap with private investors on Friday, Venizelos said. Louisa Gouliamaki/AFP/Getty Images
Peter Baldwin is a professor of history at UCLA.
The economic crisis in Europe reached its latest crescendo last night, as Greece managed, through furious last-minute negotiations, to convince its creditors to give it some more breathing room. But if the Greeks have managed to stake off ruin for a few more minutes, nothing has essentially changed in their situation: Their economy is still in shambles.
The burning question on most observers' minds, and rightfully so, is whether the Greeks will ever manage to pay back their debts. But at this stage, it's also worth considering how we ended up on the precipice of such catastrophe at all. Here are some reflections on the long road to our present disaster — and the possible paths out of it.
The economies of Europe are vastly divergent. The EU is much more variegated than commonly realized. It spans enormous economic disparities — great enough to cause problems for its functioning as a monetary union.
The Eurozone is comprised of countries that are more economically stratified and less economically integrated than the United States. Delaware is twice as rich as Mississippi measured by GDP per capita. But Luxembourg is almost eight times wealthier than Estonia. If you take the European Union as a whole, rather than just the Eurozone, the disparities are even starker, a multiple of over 16 between Luxembourg and Romania.
By way of comparison, let's consider the North American Free Trade Agreement. Though it's just a trade alliance, not a monetary union, the economic disparities it spans are much smaller: Mexico's per capita GDP is about one-fifth of America's. To match the gap between Europe's poorest and richest countries, NAFTA would have to reach all the way from the United States to Guatemala.
The European Union's long-term goal has always been to integrate goods, capital and labor markets across the continent, bringing all of its members within a spectrum of acceptable differentiation. But the sheer magnitude of its current differences has also set limits as to what can be done.
The Eurozone has taken corrective fiscal and monetary policy off the table. The Eurozone has few policy options at its disposal because it's the only monetary union in the world that lacks any of the institutions of a fiscal union. As a monetary union it has eliminated one of the most powerful tools of economic adjustment among its member nations: currency devaluations. Devaluing the local currency used to be the way that each EU nation lowered production costs, discouraged imports by making them more expensive, increased exports, and balanced trade relations. Now that the European Central Bank sets monetary policy for all countries using the euro, that option is off the table: The power of devaluation has been taken away from national capitals and given to the ECB, an institution clearly disinclined to use it.
But, because it is only a monetary union, there are few other tools that the European Union has to deal with economic shocks. Without a unified fiscal system, it has few monies to redistribute to regions in need. The EU's own budget is some 120 billion euros annually, tiny compared to 800 billion euros of annual French expenditure or the 3.7 trillion dollar U.S. budget. The EU is essentially a regulatory union. It imposes rules whose cost are borne by its members. Insofar as it redistributes resources it is mainly through the Common Agricultural Policy, 40 percent of its budget.
Some money is channeled to public works, often with an eye to regional development. But it doesn't compare to the sorts of stimulus that we've historically seen in the United States. Think TVA and interstate highways, NSF and NASA, or FEMA. It was not an accident that the federal government, in 1946, decided to locate the Center for Disease Control in Atlanta, a hub of a struggling region. In 2005, its European equivalent, the ECDC, was parked in Stockholm — not exactly needy territory.
Or consider the billions that course around the American economy with each financial crisis — from the 12 figure sums channeled to Texas alone during the Savings and Loan debacle of the mid-1980s,to the bailouts of Detroit and the financial industries of New York and Connecticut, to the hundreds of billions of dollars of new mortgages guaranteed by the Fed once the private sector refused to buy residential mortgage loans. (By effectively nationalizing the mortgage industry, Washington has channeled enormous sums to hard-hit markets in the west and southwest.) In the twenty years from 1990 to 2009, federal taxing and spending imposed a net transfer from New York state to the rest of the union of $950 billion, on average 47 billion annually.
By comparison, Germany contributes some 8 billion euro net to the EU. The Germans and the other EU nations do lots of internal redistribution, of course — but not through the EU to fellow members. As a recipient, Mississippi received twice its annual GDP from the rest of the union over this period. Were Greece to receive a similar share, the EU would have paid it $38 billion annually. In fact, its actual net receipts from the EU are about 3 billion. The practical effect of Europe's lack of fiscal integration is that a poor nation like Greece would be much better off as an American state than as an EU member. And conversely, much less is asked of prosperous EU nations like Germany than of rich states like NY.