The Off-Ramp From Grexit: A Road Map to Sensible Economic Reform
We live in uncertain times. As if Brexit, a populist President in the US, and Russian hacking were not bad enough, global financial markets must contend with the prospect of Greece defaulting on its sovereign debt. The very possibility of such an occurrence threatens the viability of the world’s second largest economy in the E.U. and the world’s second largest reserve currency, the euro. Following the 2008 financial crisis, countries large and small were compelled to get their respective fiscal houses in order, and it became painfully apparent that Greek finance ministers had employed an array of accounting gimmicks to conceal the extent of the country’s economic woes. This chicanery began in 2001 in order for Greece to enter the European Union under the conditions set forth in the Maastricht Treaty of 1992. It states, “Members shall avoid excessive government deficits… in particular… not to exceed a reference value (3%)… specified in the Protocol on the excessive deficit procedure annexed to this treaty.” In total, the true value of Greece’s debt was nearly triple the prescribed rate for a member state (8.3%) and steadily rising on account of a spendthrift attitude toward ballooning social welfare programs, an approximate 179% debt to GDP ratio according to last year’s statistics.
Such an inflammatory figure proved to be an easy target for the European Central Bank and Germany, the primary powers that dictate European economic policy. They felt compelled by withering public pressure to seek a short term ‘win’ over a long term solution. Germany and the ECB decided on inflicting as much economic pain as possible on the offending governments. Austerity became the truncheon which central Europe used to effectively bludgeon its peripheral states over the head with. However, instead of instilling a newfound sense of fiscal accountability, it nearly killed the patient. An unlikely analogy that could prove helpful in guiding Europe’s leaders out of their current predicament is drug addiction. Greece is addicted to low-interest debt, and the European Union is one big dysfunctional family that cannot agree on an appropriate method of treatment to resolve this lingering, persistent issue. However, let us not confine our attention solely to those matters affecting Greece. There is a fundamental macro-level solution that could remedy the present crisis and stave off the threat of future insolvency in Europe if implemented: Federalization. Leaders of Europe should no longer beat about the bush with vague entreaties of moving “toward an ever-closer union.” Desperate times necessitate bold, decisive actions that might seem foolhardy or downright infeasible when considered only in the narrow context of the here and now. Visionary leadership means not acquiescing to the contemporary political climate. Nationalistic fervors threaten to tear asunder a peace project born out of back-to-back world wars that claimed entire generations of Europeans. Europe’s leaders must ask themselves, “For what purpose did those countless multitudes of men, women, and children give their lives?” Did they die so that Europe might succumb to its baser instincts? Shall it once more become nothing but an assortment of warring tribal factions bent on mutual destruction?
It is imperative that Europe give equal credence to both history’s successes and failures, so that a future of peace and prosperity might be ensured. Nationalism and wars are the fast-track to oblivion, but luckily, there is a model country that illustrates the benefits, economic and otherwise, of choosing to double-down on increased federalization; the United States of America. The Articles of Confederation were jettisoned for the Constitution, which provided the solid foundation for coordinated economic and military policies amongst its various member States. It has proven so successful that it is now practically incomprehensible to conceive of a reality in which the States would choose individual sovereignty over unity.
A federalized system would require selling a skeptical public on entrusting the European Parliament, European Court of Justice, and European Central Bank with far greater power over national affairs. However, Europe can find galvanizing figures within its political class, particularly younger representatives, to sell a European Super-State as the radical change necessary to lift the people of Europe out of their malaise. Emmanuel Macron’s rapid ascent in the world of French politics can be attributed to his campaign platform emphasizing the positive aspects of France’s E.U. membership, “The European Union… remains the best guarantee of peace on the continent… with undeniable gains in terms of economics, culture, education, and everyday life… we must regenerate the European ideal.” His triumph in becoming the President of France proves voters, especially younger voters, are receptive to the idea of increased federalization, and they are willing to align their individual country’s future successes with continued European success. In order to begin a process towards federalization, Greece must undergo drastic institutional reform. First, it needs to restructure its tax code, reduce regulations to make Greece more attractive to new investors and capital, and enforce collection of outstanding debts owed by citizens and corporations alike to pay for its social services. In addition to Greek reform, Europe’s hegemony must accept the painful reality that its solution for the European Debt Crisis has been a complete and utter failure. Germany and the ECB must relinquish on their demands of austerity in exchange for future cash bailouts and quantitative easing of debt, but they should not do so until a contract is drawn up to ensure that Greece will institute the necessary reforms to avert future financial disasters. If these common-sense solutions are implemented properly, Greece’s economy can be saved from collapse in the short-run and bolster the possibility of increased federalization in the long-run. Europe is stronger together. European elites should prioritize retaining its peripheral zones of economic influence with the U.S. as a model. The plan should include fiscal federalism with an overarching ‘national’ economic policy, centralization of finances, and subsidizing of weaker ‘states’ for production of net gains for all parties in question.