There’s been a huge backlash after Greece’s latest bailout deal was finally agreed in an emergency summit of European leaders over the weekend.
Social media immediately objected, as only social media can. #ThisIsACoup trended on Twitter, and people bemoaned the lack of democracy in Europe. But it’s surprising that anyone was surprised — given the tools that it has, this is the only way Europe can work right now.
In fact, the economist Milton Friedman predicted that Europe’s biggest problem would emerge just like this — way back in 1997.
The euro has mixed roots — half of it was a utopian vision of European unity. Its architects thought abolishing barriers to commerce and national boundaries could ensure Europe avoided the disastrous wars that it had been fighting, not just in the 20th century but for pretty much all of recorded history.
Half of it was brutal pragmatism. French President Francois Mitterrand panicked over the prospect of a strong Germany after the Cold War, and prodded Chancellor Helmut Kohl into accepting the euro as a price for German reunification.
By the time the euro crisis came around in 2010, the European project was only half-baked. There was a common currency, and the European parliament had more powers. But much of the infrastructure that exists in a successful federation like the United States is still missing.
There are three big problems that Europe has, all of which were on display over the weekend (and in the months and years leading up to it):
- No political union. There is no real federal Europe. The centralised institutions, like the European parliament and Commission, simply don’t have much power in comparison to the individual nation states.
- No fiscal union. Because there’s no proper political centre, there are no tax-raising powers. So by and large, poorer areas of Europe don’t get the transfers from richer ones, like states in the US do.
- No real sense of unity. Political and fiscal union are the financial problems with the eurozone — not having a common language and having a long history of conflict hasn’t helped either. Many Europeans still think of themselves, rightly or wrongly, as from their own country first of all, and as Europeans secondly (if at all).
Just in terms of the economics, European nations have given up one of their main levers in responding to crises (monetary policy), without getting any of the transfers that fiscal union would have brought. Without a single currency, Greece could respond to crises with the sort of mechanisms it has in the past — devaluation and inflation. They’re not ideal, but they’re probably better than what the country has now has now.
People who complain about the deal Greece just got have their guns pointed in the wrong direction, blaming European elites, finance ministers or individual countries. In fact, those finance ministers are acting as democrats too, but they’re not elected by Greek voters. As long as Europe doesn’t have a political union, awkward supranational deals like the one Greece just made are the only way decisions will be made.
The German, Dutch and Finnish electorate wanted a harsh line to be taken on Greece, probably an even harder line than their finance ministers took. Even in France, polling suggests people think Greece should stay in the eurozone only by a thin margin.
That’s the problem that can’t be solved by treaties — people in Munich don’t seem think of people in Rhodes in the same way that people in Ohio think of Nevadans. That matters, but there’s no obvious solution.
So the reaction of anger about the outcome is understandable, but misplaced. The process of this deal wasn’t dissimilar to the bailout programmes that have already passed — the other eurozone governments were a little less sympathetic, partly due to public pressure, and the Greek government was more radical than ever. Trust and relations were more strained, but the basic shape of the deal is recognisable.
This isn’t an original take on the eurozone’s problems. In fact, you could go back to read Milton Friedman in 1997, before the currency even began, to get a remarkably prescient point:
The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. 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.
There’s two ways to stop this from happening in future, and neither will happen quickly. The first is the breakup of the eurozone. That’s something that nobody seems to want — not even the Greek people, who’ve been through a crushing depression and still overwhelmingly want to stay in the currency union.
The second is the slow process of creating the “ever closer union” that the founders of the European project envisioned when they began in the 1950s. It will need a political and fiscal union (to go with the banking union that’s been agreed since the crisis).
It will take a long time. It may be painful and countries may quit along the way. But it’s the only other way to do this.