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Global Policy Studies & International Security

The Kernels of the EU

Since the summer before I started attending the LBJ School of Public Affairs to four weeks before the end of my first semester there has been one topic in and out of news headlines: Greece and the European Union. The headlines have read just about everything from Greece defaulting on its’ loans, to credit rating drops, to Greece rejecting the euro (thereby leaving the EU) and, finally, the European bailout plan for Greece.

Upholding international treaties is no easy task but it all comes down to enforcement of the rules. There are rules to joining the EU (a thick stack of rules) and you must follow the rules if you want to play the game.  The game here is one of solidarity, where individuals from member countries can move freely within all other member countries and utilize the same currency. Greece has clearly taken advantage of this scenario and is currently free-riding the EU system; it deliberately broke the rules.

My personal view is that Greece should be removed from the EU. I understand after reading that statement most people are giving me a mortified look because building the EU is all about solidarity. However, removing Greece from the EU would be the best decision from a continental point of view because its contribution to the EU is minimal and its debt within the union is high with over 50 percent of the debt held by France and Germany.

Let’s be clear that Greece rejecting the bailout would mean Greece leaving the EU and thereby rejecting the euro. The euro is a symbol of stability and prosperity for its 27 member countries. Leaving the euro would mean return to the drachma. The drachma was removed in 2002 when Greece switched to the euro when inflation was relatively high and the euro represented credibility for Greece. Re-introducing the drachma into a broken economy will likely lead to more supply than demand and uncertainty for stabilization, so the question begs: Bailout or leave the EU.

The EU bailout plan involves a large flux of cash into the European financial stability fund, massive financial help and most of the debt written off with help from private investors. An interesting comment made at Crisis in the Eurozone conference held on November 3 by Professor Yanis Varoufakis has forced me to ask the question: “Is this the appropriate fix?”

He said the events in the Eurozone are not like dominoes. It is not as if one domino pushes down another and the chain continues on but more like popcorn kernels. As you heat the kernels, they will begin to pop. It won’t matter whether the first kernel is taken out; the others will continue to pop. Will bailout number two put the EU in the clear and help it become the union that is once envisioned to be? I tend to think not.

After listening to Professor Varoufakis  I must re-think my view of removing Greece from the EU. According to the theory of second best, if one market failure is fixed or corrected in an effort to increase economic efficiency the results may go unseen or may not produce results due to another market failure. Thus, the optimal strategy may be to let both imperfections cancel each other out. In our example, the current market failure is Greece but with other member countries within the EU being deeply indebted, I believe the question really become – is the EU set up for success?

The final verdict on the success of the EU  is still unclear so the world is waiting and watching to see if the kernels continue to pop.

 

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