Will Greece Sink the EU?

The country’s budget crisis threatens to torpedo Europe’s monetary union.

If the European Union was like the television series Survivor, Germany and France would be about ready to vote Greece off the island. Sadly, the current political and economic crisis in Greece is not entirely the fault of its leaders. Sure, they engaged in some seriously profligate spending, but Greece is not the only state in the EU that possesses the dangerous combination of high debt and high deficit.

To some degree, the current situation is the latest round of fallout from the global financial crisis. After all, Greece has Goldman Sachs to thank for the currency swap that effectively hid much of its debt, and credit default swaps gave major European bankers the illusion of an insurance safety net around Greece, when the more appropriate metaphor was a freefall without a parachute.

But the bigger issue is what the crisis in Greece will mean for the future of the EU – specifically, monetary union and the political “deepening” now being implemented as a result of the Treaty of Lisbon, which became effective last December.

Public sector and general strikes have paralyzed Greece in recent weeks, and it will be difficult for any Greek government, regardless of political stripe, to impose the deep cuts and structural reforms necessary to reduce the deficit and begin tackling the debt.

Pressing the rewind button might help us understand how Greece and the EU got here and what will happen next. Monetary union, as envisaged in the Maastricht Treaty of 1992, was Europe’s great post-Cold War achievement prior to allowing the former satellite states of Central and Eastern Europe into the Union in 2004 and 2007. Giving up their precious Deutschmark for the Euro and agreeing to the European Central Bank was widely understood as Germany’s quid pro quo for getting French approval for German reunification.

However, the process happened backwards – greater political integration should have occurred before economic integration, particularly because each EU member state still controls its own treasury. Being part of the Euro zone does mean you promise to behave according to strict criteria and never let your deficit crawl above three per cent of overall GDP, but this can be difficult to enforce. Greece is just under 13 per cent at present. Put simply, it broke the rules in a big way.

Since the 1957 Treaty of Rome first created what was then called the European Economic Community, European “deepening” and “widening” has happened in accordance with a logic of functional spillover. Once the primary industries of coal and steel were unified, it made sense to create a common market, customs zone, and so on.

But a common currency requires a level of political integration and means of redress if countries are not going to live up to their promises. The paradox, however, is that as much as Europeans and tourists love travelling around the continent with one currency in their wallet, they balk at things like a European constitution or a single European treasury.

Now the Treaty of Lisbon promises “constitution-lite,” with more streamlined voting procedures, an appointed (but not directly elected) European Council president, more legislative power for the European parliament, and a list of exclusive, shared, and supporting competencies that look suspiciously like the division of powers in the Canadian Constitution Act. All of these efforts will hopefully inch Europeans along toward accepting the inevitable.

Will the Greek crisis mean the end of the Euro? I doubt it. The EU has a fine tradition of “muddling through,” just as we do in Canada. If the spillover logic continues, then the member states and their populations are going to have to bite the bullet and accept a level of federalism similar to what we have in Canada, where the “have” provinces bail out the “have-nots” via transfer payments. If you live somewhere like Alberta, you have to learn to suck it up as the price of being Canadian.

Minimally, richer states like Germany are going to be forced into a bailout that includes more than just new loans. This will be a hard pill for Germans to swallow – after all, they are still paying for reunification, which has cost them more than $1 trillion (U.S.) and counting. However, European monetary integration is too important to undo, and there is no precedent for rolling back an essential element of the European Union.

Ironically, in some ways the EU is more centralized than Canada – particularly because of nationally-imposed standards via the acquis communautaire – the more than 30,000 pages of regulations that bind the member-states together. Maybe the committed Eurocrats should look less to creating a “United States of Europe” and more to creating a “Canadian-style” Europe.