EU designed to fail
Posted: Monday, May 3, 2010 8:03 pm
By: Douglas Cohn and Eleanor Clift
By DOUGLAS COHN
and ELEANOR CLIFT
WASHINGTON – The downgrading of Greece’s debt rating to junk bond status sent shivers throughout industrialized markets, raising concerns in Europe about whether a planned $60 billion bailout can survive this latest obstacle in skeptical European capitals. With public opinion in Germany strongly against aiding Greece, German Chancellor Angela Merkel is wary of any bailout without enforceable conditions on the Greek government to cut spending and reduce the country’s large and bloated public sector.
One of Greece’s options would be to drop out of the European Union and reclaim its right to print money, which is what the U.S. Treasury does when money is short. But it’s too late for Greece to do that; it would be the laughing stock of Europe, if not the world, and wouldn’t have any credit to borrow money anywhere.
The Greek government has been spending way beyond its means, and its efforts to cut back have been met with fierce resistance by the public. Striking dockworkers have left tourists stranded on ships; transportation workers stopped bus and train service for six hours to protest cuts in pay and pensions; and that’s just the beginning. Unions representing 2.5 million workers are planning a mass march next week to protest the government’s austerity measures.
The European Union was created in 1993 to maximize Europe’s clout as a trading bloc, but Greece has severely strained the one for all, and all for one spirit that brought 27 member nations together. Greece’s debt is now 124 percent of its gross domestic product (GDP), more than double the 60 percent that EU nations had agreed was the maximum sustainable amount.
Germany’s resistance to backing a bailout which would have to get the backing of the Bundestag is a symptom of a larger problem, and that is whether an economic union can survive in the absence of a political union. Germany’s political leaders doubt that Greece can shrink its spending and trim the government’s payroll in the face of such massive public opposition, and if Greece falls short, other European governments, some strapped themselves, are unwilling to be the safety net.
Greece could be the first crack in the armor of the EU, threatening its survival as an organization willing and able to care for its own.
Standard & Poor’s, the premiere rating agency, also downgraded Portugal to junk bond status, and as world markets tumbled in response to the news, word came that Spain was also getting a ratings downgrade.
When the European Union was created, part of the deal was that each country would give up its national currency to adopt a common currency, the Euro. British voters refused to go along with that, voting down the measure in a referendum; the pound remains the British currency. It’s more than symbolic, as the Greek government is discovering.
When they got in over their heads, they couldn’t print Euros and are probably more reliant than they would like on their fellow Europeans.
Critics of the mounting debt that the politicians are running up in Washington warn that America could go the way of Greece. The facts are otherwise. The U.S. deficit as a percentage of GDP is only 10.64 percent. Even at the height of World War II, when the percentage was at its historic high, it was only 28.05 percent.
It is no wonder that the dollar is regarded by capitals around the world as a safe haven.
If the economic dominoes continue to fall in Europe, however, the EU may prove to have been nothing more than a failed experiment in economic dependence without political dependence.
Published in The Messenger 5.3.10