Greece's debt situation has pundits taking out their crystal balls trying to divine the future not only of Greece, but also the euro and Europe. Every news outlet from The New York Times to National Public Radio has joined the chorus of gloom and doom. But what all these experts have failed to notice is that Greece's debt crisis may turn out to be one of the best things to have happened to the European Union.
In the post-World War II era Europe has always evolved and adapted--and ironically grown more unified–in response to a crisis. And as crises go, the Greek one has been manageable. The Greek economy is only about 2% of Europe's economy, compared with, for example, California's, which is about 14% of the U.S. economy. California, which had to issue IOUs to cover its debts and is slashing jobs and social programs at state and local levels, is literally "too big to fail" since its own weaknesses threaten the national recovery. So it's fortunate that Greece's situation is comparably small and manageable.
But it still has signaled a badly needed wake-up call for the rest of Europe. And that wake-up call has resulted in proposed reforms in a number of neglected areas that, if passed, will lead to sensible financial regulation and transparency--as well as strengthen European unity even more.
The first of these proposed reforms is in financial re-regulation. The news that con artists at Goldman Sachs had helped Greece hide its massive deficits has spurred Europe to finally move forward with a crackdown on hedge funds, derivatives and credit default swaps. Europe first proposed such regulations a year ago during the G-20 meeting, but U.S. Treasury Secretary Timothy Geithner dithered. Now it appears that Europe won't wait while America drags its feet. Greece has pushed the E.U. to its limit.
Greece's profligacy, as well as that of other euro zone members, was enabled by a lack of transparency that allowed Greece to submit falsified finance reports without getting caught. Ironically, in 2005 there was an effort by the European Commission to equip the E.U.'s statistics agency, Eurostat, with the right to audit figures submitted by member states. That recommendation was rebuffed because finance ministers did not want anyone looking over their shoulders. Now that proposal has been resubmitted to member states--and it is expected to pass.
Finally the euro has been an enormous political success in that it has bound together former combatants from two world wars into "peace and prosperity" partnerships. But it always has lacked an important component that has benefited the U.S. When a euro member gets into financial straits there is no mechanism for a backstop that can bail out the troubled member, like the American federal government can do for any of its 50 states (though when California requested assistance from the Obama administration, the White House said "nein," causing California to issue its IOUs).
But now it appears that this "structural crack," as former U.S. Federal Reserve Chairman Paul Volcker has called it, will be addressed. The European Commission has proposed a European Monetary Fund that would provide the euro zone a sort of finance ministry that could tackle the default of a member state, or force a country to cut its deficit before it got out of hand.
This idea of surrendering a measure of financial sovereignty would never have occurred had the Greek crisis not arisen. Now, as a result, "There is a clear sense of determination to act," says Amadeu Altafaj, spokesman for the E.U. Economic and Monetary Affairs Commission.
So rather than meaning the end of the euro or the E.U., as some doom-and-gloomers have predicted, the crisis may have the opposite effect. In a recent interview Tommaso Padoa Schioppa, former Italian Minister of Economy and Finance who is considered one of the founders of the euro, said that the Greece situation "confirms the necessity and role of the euro" and will bind the E.U. closer and ultimately strengthen it as all sides recommit to this union-in-progress.
To what degree that ultimately holds true is hard to say, but the E.U. member states certainly have swum too far across the stream to turn back now. While the current situation is messy and noisy, the E.U. often has evolved in reaction to a crisis. During each crisis Eurosceptics have predicted the imminent demise of Europe, and each time they have been proved wrong. Indeed, when the euro was first launched many predicted it would fall flat on its face.
Crystal ball gazers would do well to remember that the European Union is young. Its current configuration of 27 nations and 500 million people dates only from 2004; the Lisbon Treaty was ratified just last year, and the Maastricht Treaty establishing the E.U. was signed in 1992. It took the U.S. about 90 years from the formation of its first government in 1790--and a bloody civil war--to congeal from a collection of regions into a nation.
In the post-World War II era Europe has proved remarkably resilient. The E.U.'s brand of social capitalism has generated tremendous wealth, contrary to the skeptics' claims. Yet Europeans have also figured out how to harness this capitalist engine to create a more broadly shared prosperity. Indeed, while both Greece and California are in major belt-tightening mode, at least in Greece all families and individuals still have access to health care and a long menu of other supports that Europe is known for.
In California a recent study found that nearly a quarter of the state's 37 million people have no health insurance, not to mention any other support net, which only further reduces consumer spending and weakens the economy. (The recent passage of Obama's health care legislation should reduce the number of Americans without health care over time, but its ultimate impact is unknown.)
It seems unlikely that the latest crisis caused by Greece's excesses will unravel this remarkable invention known as the European Union. Indeed, the crisis seems to be spurring Europe to fine-tune its vision and its institutions, making it even stronger.