Stanford Progressive

Testing the Eurozone: The Greek Debacle and the Future of the EU

By , published May, 2010

The crisis in Greece has raised old tensions and disagreements among European leaders, but hopefully the result will further strengthen, and perhaps even redefine, the EU. After adopting the euro currency back in 2001, the Greek government began a spending spree based on borrowed money—a bad habit that was enabled by the Eurozone’s low interest rates. The government cooked the books for years until the incoming government owned up to the country’s alarming 13% budget deficit, twice what was previously claimed.

This situation sparked a debate among EU governments between the two unappealing choices: they could either bail out Greece, or let it drown amidst its rising interest payments—an option that might also imperil the other troubled Eurozone members, Spain and Portugal. After a lengthy debate, Europe’s leaders have agreed on a mechanism to rescue Greece from its severe credit crunch, but it leans closer to abandonment than to bailout. Greece will be able to tap into emergency help, but only if experts from the European Central Bank deem market financing insufficient to meet the Greek government’s need. They insist that Greece raise its $72 billion of debt this year from finance markets, which would make the European bailout unnecessary. The loans would be offered at above average Eurozone rates to encourage recipients to return to market financing as quickly as possible. This same rescue mechanism would apply to any other euro-area country in a similar situation.

The main issue of contention has been the nature of the mechanism. German Chancellor Angela Merkel insisted that a significant portion of the loans come from the International Monetary Fund to insure that financing would include hash conditions. This term was particularly unfavorable to French president Nicholas Sarkozy, who argued that involvement of the Washington-based and American-dominated institution would amount to a “humiliation” for Europe. In the end, Merkel seems to have gotten her way. Asked why he conceded to her, Sarkozy replied, “Europe is a compromise.”

To portray this occurrence as simply a victory for Merkel or Germany, however, would be misleading. The creation of a “European economic government” has been a longstanding French ambition for the EU—an achievement which Sarkozy has described as “a major step.” This development, which Merkel has repeatedly resisted, required a significant concession on her behalf as well. Facing elections on May 9, Merkel was under fierce public pressure opposed to footing the bill for Greek governmental corruption and malfeasance. The harsh stance played well back in Germany, and fulfilled Merkel’s twin goals of reaching an agreement to calm the markets while still defending her role as protector of Europe’s largest pocketbook.

This recent issue must be viewed in the larger context of European integration, as this debate brings France and Germany back into very familiar territory. Both countries started from very different places back in the 1990s when the single currency was first negotiated, and they still have very different ambitions for the monetary and economic union. Germany is concerned with budget rigor and discipline, while France is more interested in the standardization of tax rates and budget policies and political intervention in exchange rates. Back in the 90s, the compromise involved a concession to France—the southern European countries were admitted to the EU, and a concession to Germany—the currency was deliberately designed without any mechanisms for bailing out drowning members. Yet, in the end of the compromise, the French were concerned with the expansion of the political and economic union while Germans feared the instability of the new EU members. The theory was that without a safety net, even southern members would not dare to stray from the narrow path of budget discipline.

The Greek debacle showed just how optimistic that theory was, and raised old concerns and visions about how the EU should operate. Germany finally agreed to the necessity of a safety net, but only the bare minimum for a mechanism that should have been designed at the start. France also has a valid argument: the EU should be looking after its weaker members without appealing to the IMF. This mechanism will not end Greece’s, nor Spain or Portugal’s, woes anytime soon; but it does strengthen another needed gap in the EU institution, albeit in a scenario one hoped would never happen. There has been a reaction against this move, and countries such as England, the Netherlands and Ireland fear the very phrase “European Economic Government.” Britain, skeptical as ever of the EU, now has one more reason to miss out on the European experiment in avoiding bailing out struggling members. Once again, slowly but surely, the European Union is moving to closer integration. Yet, it is a torturous process that tests its individual members, and the ambitious project still has many a crease to iron out.

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