The EU's Lesson in Civics

Sometimes, we are reminded that the civics class we took in high school wasn't just an occasion for the boys in the back row to pull pigtails and have snicker fests making fun of the goody two-shoe student government types who earnestly raised their hands all the time. The crisis over Greece's sovereign debt illustrates why effective government is good for business and the economy.

Late last week, the EU announced a bailout plan, of sorts, to provide Greece with assistance in case it could not successfully borrow in the financial markets. The details of the plan remain vague. One feature that was prominently mentioned, though, was that the IMF would supposedly participate in the bailout. Why include the IMF? In part, to spread the costs of the bailout farther, as a palliative to the frugal German electorate. Less publicized but probably more important is that the IMF doesn't just hand over money to distressed nations. It imposes tough love requirements for fiscal responsibility (read, fiscal austerity) that steer the borrowing nation back to the straight and narrow. These conditions fill a gap left in the EU's governance--namely that there is no means for the EU to compel its members to adhere to its fiscal standard (i.e., that their government deficits not exceed 3% of GDP). The EU ostensibly monitors its members for compliance. But oversight has failed, with Greece successfully understating its deficit for years, until it 'fessed up last fall to violations. And even if the EU had uncovered violations, it has no enforcement process to mandate improved behavior. Imagine a police force with defective radar guns, no cruisers and no ticket books, and you have the EU.

The IMF can produce results. The Asian Tiger nations caught in the 1997 currency crisis spent time in IMF boot camp, down on the deck giving twenty. Today, they are prosperous. The IMF cure involves painful economic adjustments and more than a smidgen of increased unemployment. So the threat of IMF involvement may push Greece to get right with the EU. But one high ranking EU official, Vitor Constancio of Portugal (a nation with its own sovereign debt problems), reportedly rejected IMF involvement. So the waters were muddied just as they were clarified.

The generality and absence of details about this bailout package raises suspicions that the EU is gaming the financial markets, announcing the discovery of the Seven Cities of Cibola without explaining precisely how to get there. Talk therapy is a cheaper way to keep Greece's borrowing rates from skyrocketing than cash on the barrelhead. When you get down to it, talk may be all the EU has to offer, because it has no way to compel member nations to contribute to a bailout, even if they've agreed to participate. Add the fact that Germany still hasn't committed to help fund a bailout, and one wonders whether "bailing" here means helping Greece or avoiding any role in helping Greece.

The EU's charter (the Maastricht Treaty) is weaker than the Articles of Confederation that the thirteen original United States had to abandon in 1789 in favor of a Constitution that provided for a much stronger national government. As much as today's conservatives might dispute it, the power of the federal government is a crucial reason for America's prosperity. It promoted the development of national transportation systems (railroads, airlines and interstate highways) and communications systems (a national postal service, the telegraph, the telephone, radio, television, and now the Internet). It subsidized the settlement of farm land (with measures like the Homestead Act and the Oklahoma land rush), and helped agriculture recover from the Dust Bowl (with Department of Agriculture programs and price supports). It promoted investor confidence after the 1929 stock market crash, and stabilized the banking system with the Federal Reserve system and federal deposit insurance. Many of these programs have had disparate regional impact, where one part of the U.S. subsidizes another part. But the nation as a whole has benefited and grown. While federal policy sometimes goes too far, the United States would never have become the world's sole superpower without a powerful federal government.

The EU has almost no chance of evolving into a single nation, the way the United States unified from semi-autonomous states to a single nation. Its differences are greater than those of the American states, and there is no looming military threat (like Great Britain to the fledgling United States) to impel unity. Thus, effective government will elude the EU and its sovereign debt problems are likely to continue. As long as the EU can mollify the financial markets with talk therapy, the status quo may limp along. But if Germany's parsimonious electorate is called upon to actually plunk down real cash money, we might easily see the beginning of the end of the EU. Greece cannot be ejected from the EU (its charter has no mechanism for expelling non-compliant members). But Germany has no obligation to fund a bailout or remain in the EU. Today, the Germans expect the Greeks to behave like Germans, and the Greeks expect the Germans to behave like Greeks. Neither is going to happen. Sooner or later, everyone over there will look across the Atlantic for a bailout. With populism roiling the political waters here, there will be no second Marshall Plan.

So the sovereign debt crisis is likely to continue unless the financial markets decide against the weight of the evidence that Greece is a good credit after all. And when you get frustrated with the way things are going in Washington, just look across the Atlantic for a reminder that things could be worse, maybe a lot worse.