Wednesday, November 02, 2011

Why doesn't Greece just leave the EU?

When I filled in for Brian Wilson on WSPD on Monday, I talked with Gary Rathbun of Private Wealth Consultants as the host regularly does in the 'After the Bell' segment. One of the things I asked about was why the European Union doesn't just let Greece default and/or leave the EU so it doesn't drag everyone else down with it. As Gary explained, this is something he's advocated for a while and for good reasons.

Interestingly, today I came across this editorial in National Review (reprinted in full with permission) - which agrees with Gary. Unfortunately for all of us, centralized control and collectivism for the sake of collectivism, seem to be dominating the issue and I doubt the suggestion from both Gary and the editorial in National Review will be heeded.

Goodbye, Greece

How does one say “Goodnight, Irene” in Greek? Or “Show Me the Way to Go Home”? Or, if neither of those classic festivity-enders does the trick, “Hit the Road, Jack”? In any case, the message needs to be sent: The party is over, and it is time for Greece to be shown the door, if the Greeks cannot find it themselves, and exit the eurozone.

A Greek default appears to be imminent. The question is whether it is to be an orderly default or a chaotic one. At the moment, the odds are about even between those two possibilities.

Prime Minister George Papandreou has called a parliamentary vote of confidence and a national referendum on the European bailout conditions to be imposed on Greece. Those conditions include bondholders’ taking a 50 percent haircut on Greek liabilities while the Greek government promises to enforce austerity measures to reduce spending and return the country’s debt-to-GDP ratio to a more manageable level (though getting Greek debt down to the level legally required by the Treaty of Maastricht is not in the works, a fact that should put the European project in perspective). Athens has made such promises before. Greek unemployment remains high, its economy a shambles. The recent recession has made things worse than they otherwise would have been.

The European Union being the European Union, it had been assumed that these conditions simply would be imposed by Brussels, without the Greek people’s having a say. The vote threatens to throw a monkey wrench into European designs, and markets tanked on the news. And what would happen if the Greek electorate rejected Brussels’s agenda? It is far from impossible that Brussels and Athens would simply collaborate to impose the terms in the teeth of democratic rejection. The Greeks should keep in mind the experience of those national electorates that rejected membership in the European Union only to have the same referendum voted on again and again until Brussels got its way.

Unhappily, the Europeans aren’t much in funds these days, which has them appealing to China for assistance in their bailout scheme. Which is to say, not only would the deal make Athens entirely subordinate to Brussels, it would make Athens entirely subordinate to a Brussels that is partly subordinate to Beijing. That may be too high a price even for the pension-loving, debt-ridden, bailout-begging Greeks to pay.

And we would not blame them. Membership in the European Union as currently constituted is plainly incompatible with national sovereignty. In fact, the European project has quickly proved to be not only incompatible with national sovereignty but positively hostile toward it, its consolidation of transnational power and its running rough-shod over ancient nation-states exhibiting a degree of vigor and energy shocking even to the most suspicious Euro-skeptics. This incompatibility has come to a head now over fiscal questions, but it might have come to a head as easily over questions of national defense or immigration — questions in which the interests of a France or a Finland are very different from those of a Bulgaria or a Cyprus, but which in any case will be decided in accord with no country’s national interest but in accord with the interests of the bureaucratic elite in Brussels.

There is very little reason for Greece, Spain, and Portugal to share a single monetary policy with Germany and France — their public finances, labor conditions, balance of trade, and other economic fundamentals are radically different, and cannot be brought into harmony without something approaching a soft dictatorship. The business cycles of the members of the European Union are not coordinated, and neither are their economic interests. Less competitive nations such as Greece suffer particularly from sharing a currency with highly productive nations such as Germany, because it takes away the option of using currency depreciation to make one’s exports more attractive on world markets. (Germany, a strong exporter, has benefited from this arrangement.) There is some wisdom in human traditions, and it turns out that the Germans and the Greek have separate countries for a reason — one of them being that they are separate peoples.

The theory of Europe’s Economic and Monetary Union (EMU) is that a borderless environment with a single currency would minimize economic friction and produce vast economies of scale, making Europe’s economy more competitive. Europe had an example in the United States, roughly comparable in size and population but with a much more dynamic economy, especially when it comes to the work force. There are gains to be had, unquestionably, but there are always tradeoffs, and in this case they produce a net loss for much of Europe. This was a gross miscalculation on the part of the European centralizers, who neglected to account for the fact that important, fundamental cultural differences — including language, family habits, and religion — mean that a Bulgarian factory worker or a Latvian financial manager cannot simply relocate to London or Paris the way an American worker can move from anywhere in the country to Houston or New York with relative ease. The formal, legal barriers to European integration are not the only barriers, nor even the most important. As it turns out, there are not many Europeans in Europe, which is mostly populated by French, Germans, Swiss, Italians, Greeks, Poles, etc. Wishful thinking will not make it otherwise.

Such realities can only be ignored for so long. The appetite of the Greek people for further austerity measures is limited, as is the appetite of the German people for expending their own hard-earned capital to prop up their careless, spendthrift neighbors. Nobody in Europe has much appetite for continued economic chaos. The best outcome and less likely outcome would be to have the economically stable northern European countries break away to form their own union. The second-best and more likely outcome is for Greece to leave the eurozone, voluntarily or involuntarily. Either scenario would probably entail a default and would bring about massive economic disruption, and not just for the Europeans. But the alternative is a prolonged, slow-motion crisis and the entrenching of the one-size-fits-all, central-planning approach from Brussels that is a very large part of the present problem and no part of its solution.

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