Bailing Out Greece: An Opportunity to Create a More Powerful EU
On February 11 EU leaders agreed to provide financial support to Greece to keep it from defaulting on its bonds. The argument given here and elsewhere is that a bailout for Greece would help stabilize the Euro zone. Is Greece too big to fail? Could a default by Greece really destabilize the Euro?
I have yet to see a good argument as to why this is the case. First, if one is narrowly concerned only about the Euro, bailing out Greece can’t help support the Euro, and likely will weaken it. A default by Greece should have no effect on the value of the currency, but an EU rescue might lead to political pressure to finance it partly by printing more Euros, resulting in inflation and a weakening of the Euro.
I can see that with other Euro zone countries like Spain and Portugal in similar situations, a default by Greece would raise questions about whether other EU countries might follow. But taking this to its logical conclusion, that also means bailing them out too, which would be even more costly, and even more likely to lead to inflation and a reduction in the value of the Euro.
Another possible negative consequence of a Greek default would be that banks in other EU countries holding Greek bonds could be hurt. But wouldn’t the more sensible policy in this case be to support those banks directly, rather than the Greek government? Germany, for example, could buy any Greek bonds held by German banks, much as the Fed bought toxic assets of US banks. I’m not saying this would be a good policy; I’m saying it would be better than bailing out Greece.
The EU monetary union requires members to maintain a budget deficit of no more than 3% of GDP and a national debt/GDP ratio below 60%. Greece has violated both of these requirements, and not by just a bit. Apparently, then, the EU leadership holds the view that if its rules are violated, the EU as a whole should provide financial support to the violators rather than let them suffer the consequences of violating the agreement. This amounts to an open invitation to other deficit-laden EU countries to ask for the same support.
So, how can one make sense of the EU’s support of Greece’s fiscal irresponsibility? It presents an opportunity for EU politicians to solidify and centralize their control over EU states. EU politicians have long-desired to increase their control over member states. Recall the 2005 EU constitution that would have substantially moved in that direction. In every country where politicians had a say, they approved it, but in France and the Netherlands, where it was put to a popular vote, it was rejected.
As EU politicians continue to grope toward a constitution that will further centralize political power at the EU level, a Greek bailout presents another opportunity. If the EU assumes the responsibility for the fiscal problems of its members, it then has good reason to extend additional powers to oversee and control their budgets.
Surely a bailout for Greece would be followed by additional powers at the EU level to control not only Greece’s budget but the budgets of all EU members. The EU can’t put itself in a position of agreeing to support fiscally irresponsible member states without also having the ability to exercise more control over them. The Greek fiscal crisis is just the kind of opportunity EU politicians have been looking for.
Is there a better explanation for the EU’s political leaders’ support of a bailout for Greece?