Strange Politics: The European Union

Cartoon by Clay Bennett of the Chattanooga Times Free Press

Just when it was looking like the global economy might be improving, a new crisis is looming across the pond in Europe.

The government of Greece owes banks, governments, and other bondholders 160% of their nation’s GDP, thanks to years of unsustainable high spending and large numbers of people cheating on their taxes. Although a major breakthrough bailout deal was reached in March, it imposed such severe budget cuts that Greeks took to the streets in protest and elected a parliament full of politicians who want to scrap the deal entirely. The new parliament was unable to agree on a proper government, so new elections will be held next month, but once again polls put opponents of the bailout deal on top. And even before the elections are held, a run on the banks in Greece is already starting, as fears of Greece giving up the euro as their currency and returning to their old drachma starts to look more and more like a self-fulfilling prophecy. And while Europe’s leaders all say they want Greece to stay in the euro, the likelihood of a “Greexit” is growing by the day.

Why is this such a big deal? Well, Greece is far from the only country in Europe with a huge debt crisis, harsh and unpopular “remedies” essentially imposed on them by Germany and the European Central Bank in return for bailouts, and an economy struggling to cope. Spain, Italy, Portugal, and Ireland are just a few countries considered “at-risk”, and a Greexit could cause a chain reaction that breaks the European Union apart and sends Europe into a new economic depression. The shock waves of such a disaster would be felt in virtually every country around the world, as Europe is one of the world’s biggest economies and has trade relations with almost everyone (see: all the European cars, foods, beverages, cosmetics, video games and furniture available here in the States). As one BBC columnist put it, “The European Dream has become a nightmare”.

But all of this begs some interesting questions. How is it that an economic problem could undo the European Union? After all, when the recession hit, not very many people were predicting the imminent collapse of the United States. And why does one European country, and not exactly an economic powerhouse at that, matter so much?

To answer these questions, we must first ask a much more basic question, with a not at all basic answer: What is the European Union?

The European Union is the culmination of decades of work by idealistic and visionary leaders who wanted to ensure that, after the disasters of the first and second World Wars, a third such conflict that rips Europe apart and causes untold devastation would be impossible. It has undergone numerous incarnations and transformations since it was first founded in 1951 as the “European Coal and Steel Community”. Its goal was to tie the economies of France, Germany, Italy, and other European nations together so completely that war would not only be economic suicide, but would be “materially impossible”. This first international economic order was quickly followed by two more: the European Atomic Energy Community and the much broader European Economic Community. These three organizations were merged in 1967 as the “European Communities”, which were reorganized in 1993 into the modern European Union.

In one sense, the European Union is an international organization. Its members are sovereign nations, with their own histories, cultures, languages, constitutions, laws, militaries, embassies, Olympic teams, and seats at the United Nations. These nations agree to resolve their disputes peacefully, cooperate with each other in foreign policy, and to come to each others’ aid in case of a military attack (though that part is kind of redundant because nearly all of them are also members of NATO). The EU expands by admitting new countries as members, and countries are free to leave the Union if they wish – this only happened once, when Greenland left in 1985.

In another sense, though, The European Union is far more powerful than any other international organization in history. Indeed, in many areas it functions just like a national government, particularly when it comes to economics. The European Union alone has the power to control immigration, foreign trade, anti-monopoly and fair competition measures, and the fishing industry. The EU also has a huge hand in everything from agriculture, to the environment, to human rights, to energy and transportation infrastructure, to education, and even to the exploration of outer space. The EU has an elected Parliament that passes laws, a President, and even a supreme court that can overturn the laws of member nations. Citizens of EU member nations are also citizens of the European Union.

The EU has a common passport design…

…a common ID card…

…a common licence plate design…

…and of course, the famous euro.

And so we return to the problem. See, the euro is just as bizarrely half-and-half as the EU that spawned it. Though many nations have adopted it as their currency, not all of them have; the United Kingdom, in particular, has famously been stubborn in keeping its pound. Control over the euro and its supply is vested in the European Central Bank, an independent, international body designed to be impartial, kind of like America’s Federal Reserve. Except the ECB is not quite the same animal as the Federal Reserve. While the Federal Reserve has many objectives, such as keeping the economy steady and promoting employment, the ECB has one job and one job only: keeping inflation below 2%. This key weakness has helped the euro crisis spiral out of control.

As the debts of EU members like Greece, Italy, Spain, and others began to get worse, these governments needed quick cash (i.e., a rescue bailout) to keep from defaulting, or failing to pay their debts back. A default, in international politics and economics, is basically like a bankruptcy: people who lent money to the government (i.e., bought government bonds) lose their money, sending devastating shock waves throughout the economy. Though economies can and have recovered from a default (as happened to Argentina a few years back), it’s generally not an ideal situation. But at least Argentina only had its own economy to worry about; the way Europe’s economy has been thoroughly integrated, a default by any one member would affect everyone.

But bailing out any one nation, let alone several, would cause inflation to shoot through the roof, so the ECB was legally incapable of doing anything about it. This meant the crisis only got worse while the EU member nations had to write a whole new treaty to save themselves.

This pattern has seen itself repeated over and over throughout the euro crisis. The European Union was simply not built to withstand an economic crisis. No safeguards and backup plans were put in place to protect Europe’s economy from a recession or a panic. Only now, in an emergency, are these measures being put in place – a balanced budget agreement that seeks to keep EU members from going too deep into debt, a bailout fund to prop up weak economies and keep them from dragging the rest of Europe down – and even these rush jobs are looking very much like they will not be enough.

A large part of the problem is Germany, its voters, and its chancellor, Angela Merkel. Germany is one of the few EU members whose economy is actually doing just fine, and so it has been picking up the bill for all of these expensive bailouts. As you might imagine, this has gotten tiring, and Germans have decided to put conditions on these loans. Conditions that usually involve massive budget cuts, reduced pay and benefits for workers, and other unpopular measures that have sparked protests, riots, and resentment.

One cartoonist’s impression of Germany’s plans

Not only are these measures unpopular, but according to economic experts at The Economist magazine, they are the wrong prescription and will hurt more than help. The Economist advocates setting up some European equivalent of the Federal Deposit Insurance Corporation that keeps Americans’ bank deposits safe from economic collapses, reorienting public policy away from cuts and toward economic growth, and also adopting a single “Eurobond” that will put all of the bad debts in one basket and reduce the risk involved. Unfortunately, it seems Angela Merkel is dead set against Eurobonds and will try to block any attempt to create such a plan.

So, in summary, the European Union is something halfway between a country and an international organization, and this halfway-system was caught completely unprepared for an economic crisis. Now that they have been forced to act, they can’t agree on how to fix the problems. And with each passing day the crisis builds and it becomes more likely that the whole European Union will break under the strain. And you thought America’s politics was strange.

Information from The Economist, BBC News, and Wikipedia.

6 Responses to Strange Politics: The European Union

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