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    The New European Federalism

    The Greek debt crisis bears an unexpected gift

    by Joost de Jong

    It is Sunday in Europe, and our politicians are at work. This is quite worrisome, as these are the same people who have enshrined the half day Friday and the work-free weekend as sacrosanct in the halls of public employment. So, something is up, and indeed there is. Urgent negotiations are underway to extend and enlarge Greece’s bailout to ensure the Euro’s survival. Reports say that bets against the Euro have increased to over $16 billion, and urgent measures are required.

    Okay, let’s step back for a second. For one, a $16 billion short position is not a huge weight against the $16 trillion EU economy, so I don’t think we are facing an imminent collapse here. Meanwhile, let’s not exaggerate the importance of the Greek economy. The nation’s 11 million citizens clear barely 2 percent of the more than 500 million that make up the European Union’s population. Sure, their position is precarious, but we should keep things in perspective.

    There is something much more important in the works. The key weakness of the EU is that it is a voluntary association of independent states. Hence, it has always been difficult to enforce rules or standards on the member countries. This has been a problem since the inception of the “club” and has only become worse with the rapid inclusion of Southern and Eastern European countries these last two decades. When the Euro was introduced at the end of 2001, one would think that some mechanism had been introduced to resolve this, but, alas, the political will simply was not there.

    The rejection of the Lisbon Treaty in 2005 by France and the Netherlands certainly did not help. Only with the backdoor update to the treaty ratified in 2009 did more power devolve to the “center” of the European Union. In the US, it took a civil war to clarify the balance of state’s rights versus federal power. Well, Europe does not really have the option to engage in a civil war to ensure the compliance of a member state. A good crisis will have to do.

    Well, here we have one, packaged as a Greek debt crisis. Whereas Greece was able to devalue its currency in the past, surreptitiously taxing its population via inflation rather than by direct means, it no longer has the ability to do so. In the past, it would have devalued the currency, and pushed the problem into the future. Now, it has to make the hard choices that would return the nation to some level of fiscal responsibility. Not a bad thing, really, and something that should pay off for the nation handsomely if they garner the political will to set a realistic budget. The international crisis, falling stock markets, riots, and drop in the Euro value have done much to convince the Greek parliament to accept measures that would have been politically unthinkable at any other time.

    More importantly, however, is the significant shift of power to the EU’s center. Whereas the prevailing rules of the EU severely limit the ability to provide aid to member nations, this crisis is changing the interpretation of these limits. “Emergency” exceptions to such provisions are being used to establish mechanisms to provide funding to financially troubled member states while at the same time greatly expanding the EU’s ability to demand and enforce fiscal responsibility in return.

    The conversations among our politicians this weekend will surely expand the financial resources behind Greece’s bailout. However, the real debate is about the shift of power to the “Federal” side of the EU. The lack of constitutional and enforceable power is something that had always been thought of as a weakness to this currency since its inception. Greece’s crisis may well be the crisis that had been needed to finally convince all participants to the currency of the necessity to increase centralized control. Think of this crisis as kind of Europe’s “Fort Sumter,” and thereby, perhaps the beginning of a new recognition of the balance of power between Europe’s member states its federal administration.

    Joost de Jong writes for iTulip from Punta Chullera in southern Spain. Joost earned his MBA at Harvard and holds a degree in economics, but don't hold that against him. His opinions are his own.

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