Meeting on May 23, 2012, the E.U.’s European Council failed to come up with a plan to offset the recessionary aspect of Greece’s budget cuts. The pressure was on; the OECD had just warned that the E.U. go back into recession. Interest rates on state debt-namely that of Spain—had reached an unsustainable level the week before due to concern regarding banks based in the state. Besides the debt and banking vulnerabilities at the state level, the E.U. itself was struggling with its political weakness, which can be attributed to the states’ rights (or euro-skeptic) ideology that was not exactly going away in the context of the debt-contagion that had prompted the establishment of a permanent E.U. bailout fund for states in over their heads on debt. In this context, the European Council was at the intersection of debt, banking and political problems.
First off, we need to disabuse ourselves of some of the linguistic games that dissemble and obscure matters. The euro is not a “currency union,” as the New York Times claims. The E.U. is a union, whereas the euro is a currency. Seventeen of the twenty-seven states of the union use the currency. Accordingly, were the state of Greece to stop using the currency, the term “secession” would not apply. One does not secede from a currency. The use of such terms is so out of place that one cannot help but wonder whether there is an ulterior agenda pushing the usage. For instance, David Cameron of the state of Britain referred to the E.U. as merely one of the networks to which Britain belongs. In this view, I suppose the euro is another network. Even so, it does not make sense to say that a state can secede from a network, for secession applies to states leaving unions. It would seem that the euro-skeptic ideology had become twisted up like a pretzel.
In the early U.S., the states maintained their own currencies. When the dollar was established as the currency for all of the states, whether the debt of the states (from the revolutionary war) should be converted into debt commonly-held by the states at the U.S. level. The decision was reached that the various debts would be assumed even though doing so essentially penalized states that had done comparatively well in managing their debt. I heard chords from that debate taking place in the E.U. over two hundred years later as some of that union’s states teetered on the brink of default. On the table was the issue of whether Eurobonds should be issued. In addition to each state raising money by issuing its own bonds, each state would put at least some of its debt into a common pool. These pooled bonks would be issued by a debt agency at the E.U. level, with all of the states that use the euro essentially sharing responsibility for repayment.
At the time of the European Council’s meeting, such “collectivized debt” was not allowed by the union’s basic law. Were it constitutional, such as if an amendment were proposed and ratified, state law and constitutions would have to give way to the new E.U. competency, according the European Court of Justice. Like the U.S., the E.U. has a supremacy clause—albeit through court decisions (in 1963 and 1964) rather than as an amendment unanimously passed by the states. Unlike the U.S., the E.U. requires unanimity on the ratification by the states of a proposed amendment. Even though qualified majority voting (QMV) means that the states had become semi-sovereign (like their sisters in the U.S.), the unanimity still required for amendments means that one state could enforce its interest at the expense of the whole.
Even though the OECD and the IMF were in favor of the E.U. issuing Eurobonds to (and by) states using the euro, the state of Germany could singlehandedly stop any proposed amendment simply because the German interest opposes it. To Germany (as well as Finland and the Netherlands), issuing Eurobonds “would be a lot like co-signing a loan for a deadbeat brother-in-law.” The question is whether the states that are comparatively well-off should be able to trump any proposed E.U. amendment that is not in their short term financial interest.
It should be noted that a conflict of interest exists should a state with a relatively good credit rating veto the issuance of federal bonds. The state’s officials may willingly ignore the good of the whole (i.e., the E.U. economy) out of fear that the “jointly issued” Eurobonds would effectively enable other states to tap the state’s creditworthiness rather than face up to their own wasteful public patronage systems and corruption. Thomas Steffen, a deputy finance minister in Berlin, remarked regarding Eurobonds, “It is clear who wants what from whom.” In other words, “A lot of people want something from us.” This rather provincial attitude could trump the common good of the E.U. (or its “Eurozone”).
To be sure, the combined debt of the E.U. states using the euro was 87% of the GNP of that part of the E.U., whereas U.S. debt (federal and state) was above 100% of the GNP (the Eurozone of the E.U. and the fifty U.S. states having roughly comparable populations…330 million and 310 million, respectively). It could therefore be argued that the E.U. economy was sufficient to handle even a Greek default. Furthermore, German officials have raised the legitimate point that euro bonds could essentially federalize Europe's over-reliance on debt. The U.S.'s own $16 trillion in federal debt was doubtless a baleful sign of where federal debt could lead.
Additionally, according to the New York Times, for Eurobonds to get the sort of low interest rate that U.S. Treasuries did at the time, the “commonly-issued” Eurobonds would still need to be backed by a central treasury, or at least an agency with direct access to tax revenue from each state. Such talk has some “experts” going over the top, suggesting that such a change could lead to “political union” (i.e., as if the E.U. were at the time merely a network that just happened to have a parliament, two presidents, an executive branch, and a supreme court). Such is precisely the kind of talk that keeps the E.U. mired in fearful paralysis. The change that would be necessary for Eurobonds is merely incremental, the E.U. already having achieved some governmental sovereignty.
Of course, it could be that Eurobonds could be avoided by the use of alternative devises to help Greece. Specifically, the New York Times reports that less controversial measures than Eurobonds, such as increased funding for the European Investment Bank, the repurchasing of existing European structural funds, and even “project bonds” issued by the ECB could be used. The last option would seem to violate the E.U.’s own prohibition of collectively-issued bonds, though perhaps there is an exception in the fine print for project-specific funding. Even so, the use of such “project bonds” to stimulate a state’s economy would likely result in a case before the European Court of Justice (likely with the German state government as the plaintiff).
Even if the need for Eurobonds could be obviated, implicit in Steffen’s outlook is a lack of concern for the good of the whole—meaning the overall economy of the European Union (and especially in the regions of the union where the euro is used). In a federal union (and generally), the good of the whole should not be held ransom to the good of each part. In other words, the immediate interest of a part should not be allowed to paralyze the whole from being able to make answer to problems that threaten the viability of the whole. The inordinate power of state governments at the federal level can thus be seen to be problematic for the good of Europe. Also problematic was the apparent lack of acknowledgement that being in a union means that your state’s interest is no longer necessarily primary because there is a greater good that should not succumb to such a partial good.
Thanks to the efforts of state officials to maintain the ability of each state to veto a proposed E.U. amendment, the E.U.’s enumerated domains of authority (i.e., competencies) were insufficient at the time of the debt crisis to support a common currency (i.e., the euro). The lack of competency to issue Eurobonds translated into a lack of authority to fund and direct stimulus spending to Greece in over that that state might stave off more severe recession and thus probably default (which would harm German banks). Part of the problem of a part being allowed to trump the collective good of the whole is that the part could wind up getting stung by its own veto. In other words, it could be a case of “be careful of what you wish for—you might just get it!”
For Germany, getting what it wanted (before the Greek election in May 2012) meant a future of more budget cuts in other E.U. states (e.g., Greece) triggering recession in them. Given the absence of any counter-balancing stimulus spending, the resulting austerity-induced recession could make default more likely not only because of the increased debt needed to finance rising entitlement payments, but also because the political reaction in the state to the “austerity-only” approach could result in the state being cut off from the existing bailout funds because the deal is off on the austerity itself. Both politically and economically, the problem facing the E.U. and its states has been a lack of balance. As the New York Times put it, the talk of Eurobonds “inevitably raises fundamental questions about the nature of the European Union.” The imbalance therein suggests that the Europeans have been dodging such questions rather than facing them straight-on.
Nicholas Kulish and Paul Geitner, “Euro Zone Crisis Boils as Leaders Fail to Signal New Steps,” The New York Times, May 23, 2012. http://www.nytimes.com/2012/05/24/world/europe/euro-crisis-intensifies-as-leaders-bicker.html?pagewanted=1
Jack Ewing, “Facing a Teetering Greece, Europe Plans for the Worst,” The New York Times, May 24, 2012. http://www.nytimes.com/2012/05/25/world/europe/risk-of-greek-euro-exit-has-europe-making-plans.html?ref=world
Jack Ewing and Paul Geitner, “As Euro Bond Wins Supporters, Details Remain Vague,” The New York Times, May 27, 2012. http://www.nytimes.com/2012/05/28/business/global/in-euro-zone-a-debate-over-bonds.html?pagewanted=1&ref=business