The Price of Union
Europe is close to sealing the deal on a unified approach to the looming financial crises – but even at this late hour there are still tensions that threaten to boil over. Many are surprised to observe the European Union’s inability to execute a bailout of Greece. It is even more surprising to think through the consequences of a failure to find a solution. Greece right now needs an estimated $300 billion. Bear in mind that the 2010 GDP of Greece was $318 billion. And even then European banks need close to $100 billion to help absorb the losses from Greece.
It is a hefty bill to consider – but a precedent for these kinds of activities has already been set by the United States. In perhaps the most unpopular piece of legislation to pass congress, the US Senate and House passed the Troubled Relief Asset Program (TARP) – which cost a whopping $700 billion. The US managed to do so in a week. The banks remain deeply unpopular for their role in destabilizing the global economy.
Despite this – and a deep partisan divide – the US government acted in concert to release billions to major banks. This policy was overwhelmingly successful – the banks were able to pay back the American people within two years. Compare this situation to that of the European Union. The institutions that need funds are not despised banks, instead they are countries seeking to provide services to their citizens. The total bill is a fraction of what the US bailout was. And despite the widespread knowledge that failure to act will result in a financial collapse, the stalemate has been constant for months.
European countries have managed to extract tremendous concessions from Greece – much more than anything the banks promised during the US bailout. Why is Europe unable to execute such an obviously effective policy? The answer is part structural, part historical. The European Union is only just past 20 years old, and has shared a currency for only a little over 10 years. With such shallow roots, fraying in hard winds is inevitable. Also, it bears mentioning most history books are filled with hundreds of pages detailing how Europeans have fought and killed each other for the past two millennia. While the unprecedented 65 years of peace and prosperity have done wonders to heal old wounds, people are more likely to identify as German or Spanish before the broader European identity.
There is a hesitancy to take responsibly for what is believed to be ‘Greece’s problem.’ But perhaps the structural issues dominate the discussion. The European Union is structured in a way to have maximum input from its constituent countries. This instantly puts each political leader in a dilemma – do they find a solution that is best for the European Union or do they find one that is best for their own country? That is the center of the dispute between France and Germany right now. This puts the ultimate prospect of an agreement at risk. And even if an agreement takes place, it will require time and political posturing – allowing the debt contagion to spread and cause new crises across Europe.
The European Union was designed to capitalize on the economic boom times of the 90’s – few of its founders considered how the European Union could handle crises. The European Union is beginning to approach this threat – they have announced a $1.4 trillion bailout fund for emerging problems in Italy and Spain though these could overwhelm even that safety net. Only time will tell if it is enough to handle the current crises.