What’s Wrong with Europe?
By Mike Andrew
“You, with your vote, will judge us,” Greek Prime Minister Alexis Tsipras told his country in an August 20 speech, calling for new elections on September 20.
Only seven months after coming to power, the leftist SYRIZA party was splitting into pro- and anti-Europe factions, and the Prime Minister was calling for a new election to decide whether the country will remain in the Eurozone.
Tsipras is in a tough situation. Sixtyone percent of Greek voters voted against EU-imposed austerity in a July referendum, but polls show that the same percentage want to remain in the Eurozone. Those aims may be incompatible. Greece’s political crisis exposes deep contradictions in the European Union and its economic arm, the Eurozone. Former Greek Finance Minister and internationally known economist Yanis Varoufakis described the shortfalls of the Eurozone in his book The Global Minotaur. You can understand what’s wrong with Europe, Varoufakis says, by comparing it to the United States.
The United States is also a currency union – the “Dollarzone” if you will. Like the Eurozone, the Dollarzone includes rich states and poor ones.
The rich states regularly produce tax surpluses. Their residents pay more in federal taxes than the states get back in so-called “transfer payments” — in other words federal investments and benefits.
They put up with this inequality because they also regularly produce trade surpluses. They sell more to neighboring states than they buy from them, and they know that destitute neighbors make poor customers.
It would be unthinkable for the rich states to refuse to make transfer payments to the poorer ones because the US is a political union as well as a currency union. Most Americans agree that the federal government has a constitutional obligation to invest in the poor states and provide a safety net for their residents.
(Ironically, the poor states which are beneficiaries of federal spending also tend to be “Red” states that regularly vote for candidates who promise them “smaller government.” But that’s a subject for another article.)
The Eurozone is not a political union, however. The richest European countries have no obligation to make transfer payments to poor countries like Greece, and they have resisted doing so.
In fact, German Finance Minister Wolfgang Schaeuble – Varoufakis’ antagonist in this spring’s loan negotiations – seemed perfectly happy to see Greece out of the Eurozone, the country’s banks out of cash, and the Greek people living like paupers on the fringes of Europe.
Under the circumstances why would Greeks want to stay in the Eurozone?
The answer is that, like the states of the Dollarzone, the countries of the Eurozone are economically integrated, although Europe is integrated in a way that sends transfer payments from poor to rich rather than the other way around.
Like the richest US states, the richest European countries also generate a trade surplus – they sell more to their neighbors than they buy from them.
That’s part of the trap for Europe’s poor countries. They could quit the Eurozone altogether, return to their former currencies, and then devalue their money from its nominal exchange value.
That would make Euros flow into their countries as their neighbors took advantage of cheap money in southern Europe. As the rich countries consumed more of the exports of their poor neighbors, the internal markets of Greece and the other poor countries would revive, businesses would hire new employees, and money would circulate again. However, Europe’s economy has developed unevenly. The poor countries import more than they export, and the imports would become much more expensive.
Greek wine would be cheaper, but the bottles to put it in and the corks to seal them – both of which Greece has to import – would be more expensive. Greek vegetables would be much cheaper, but beef and pork would cost more because they’re imported.
Seeing a doctor would be cheap, but the medicine prescribed would be much more expensive. Donkeys would be cheap; cars, trucks, and vespas would be expensive.
In short, Greece could leave the Eurozone and probably see long-term economic benefits, but the short-term cost would be terrible and maybe too great for Greek voters to bear.
That’s the challenge for any Greek government, and, as Tsipras said, it’s up to the Greek people to judge.