The German government proposed last week that a
European commissioner be appointed to supplant the Greek government. While
phrasing the German proposal this way might seem extreme, it is not
unreasonable. Under the German proposal, this commissioner would hold power
over the Greek national budget and taxation. Since the European Central Bank
already controls the Greek currency, the euro, this would effectively transfer
control of the Greek government to the European Union, since whoever controls a
country's government expenditures, tax rates and monetary policy effectively
controls that country. The German proposal therefore would suspend Greek
sovereignty and the democratic process as the price of financial aid to Greece.
Though the European Commission rejected the proposal, the concept is far from dead, as it flows directly from the logic of the situation. The Greeks are in the midst of a financial crisis that has made Greece unable to repay money Athens borrowed. Their options are to default on the debt or to negotiate a settlement with their creditors. The International Monetary Fund (IMF) and European Union are managing these negotiations.
Any settlement will have three parts. The first is an
agreement by creditors to forego repayment on part of the debt. The second is
financial help from the IMF and the European Union to help pay back the
remaining debt. The third is an agreement by the Greek government to curtail
government spending and increase taxes so that it can avoid future sovereign
debt crises and repay at least part of the debt.
Bankruptcy and the
Nation State
The Germans don't trust the Greeks to keep any
bargain, which is not unreasonable given that the Greeks haven't been willing
to enforce past agreements. Given this lack of trust, Germany proposed
suspending Greek sovereignty by transferring it to a European receiver. This
would be a fairly normal process if Greece were a corporation or an individual.
In such cases, someone is appointed after bankruptcy or debt restructuring to
ensure that a corporation or individual will behave prudently in the future.
A nation state is different. It rests on two
assumptions. The first is that the nation represents a uniquely legitimate
community whose members share a range of interests and values. The second is
that the state arises in some way from the popular will and that only that
popular will has the right to determine the state's actions. There is no
question that for Europe, the principle of national self-determination is a
fundamental moral value. There is no question that Greece is a nation and that
its government, according to this principle, is representative of and
responsible to the Greek people.
The Germans thus are proposing that Greece, a
sovereign country, transfer its right to national self-determination to an
overseer. The Germans argue that given the failure of the Greek state, and by
extension the Greek public, creditors have the power and moral right to suspend
the principle of national self-determination. Given that this argument is being
made in Europe, this is a profoundly radical concept. It is important to
understand how we got here.
Germany's Part in
the Debt Crisis
There were two causes. The first was that Greek
democracy, like many democracies, demands benefits for the people from the
state, and politicians wishing to be elected must grant these benefits. There
is accordingly an inherent pressure on the system to spend excessively. The
second cause relates to Germany's status as the world's second-largest
exporter. About 40 percent of German gross domestic product comes from exports,
much of them to the European Union. For all their discussion of fiscal prudence
and care, the Germans have an interest in facilitating consumption and demand
for their exports across Europe. Without these exports, Germany would plunge
into depression.
Therefore, the Germans have used the institutions and
practices of the European Union to maintain demand for their products. Through
the currency union, Germany has enabled other eurozone states to access credit
at rates their economies didn't merit in their own right. In this sense,
Germany encouraged demand for its exports by facilitating irresponsible lending
practices across Europe. The degree to which German actions encouraged such
imprudent practices -- since German industrial production vastly outstrips its
domestic market, making sustained consumption in markets outside Germany critical
to German economic prosperity -- is not fully realized.
True austerity within the European Union would have
been disastrous for the German economy, since declines in consumption would
have come at the expense of German exports. While demand from Greece is only a
small portion of these exports, Greece is part of the larger system -- and the
proper functioning of that system is very much in Germany's strategic
interests. The Germans claim the Greeks deceived their creditors and the
European Union. A more comprehensive explanation would include the fact that
the Germans willingly turned a blind eye. Though Greece is an extreme case,
Germany's overall interest has been to maintain European demand -- and thus
avoid prudent austerity -- as long as possible.
Germany certainly was complicit in the lending
practices that led to Greece's predicament. It is possible that the Greeks kept
the whole truth about the Greek economy from their creditors, but even so, the
German demand for suspension of Greek national self-determination is
particularly striking.
In a sense, the German proposal merely makes very
public what has always been the reality. For Greece to have its debt
restructured, it must impose significant austerity measures, which Athens has
agreed to. The Germans now want a commissioner appointed to ensure the Greek
government fulfills its promise. In the process, the debt crisis will
profoundly circumscribe Greek democracy by transferring fundamental elements of
Greek sovereignty into the hands of commissioners whose primary interest is the
repayment of debt, not Greek national interests.
The Judgment of
Athens
The Greeks have two choices. First, they can accept
responsibility for the debts on the terms negotiated and accede to the
constraints on their budget and tax discretion whether imposed by a
commissioner or by a less formal structure. Second, they can default on all
debts. As we have learned from corporate behavior, bankruptcy has become a
respectable strategic option. Therefore, the Greeks must consider the
consequences of simply defaulting.
Default might see them frozen out of world financial
markets. But even if they don't default, they will be present in those markets
only under the most constrained circumstances, and to the primary benefit of
creditors at that. Moreover, as many corporations have found, borrowing becomes
more attractive after default, as it clears the way to new post-default debt.
It is not clear that no one would lend to Greece after a default. In fact,
Greece has defaulted on its debt several times and managed to regain access to
international lending.
More significantly, defaulting would allow Greece to
avoid fueling its internal political crisis by forfeiting its national
sovereignty. Much of the political crisis inside of Greece stems from the Greek
public's antipathy to austerity. But another part, which would come to the fore
under the German proposal, is that the Greeks do not want to lose national
sovereignty. In their long history, the Greeks have lost their sovereignty to
invaders such as the Romans, the Ottomans and, most recently, the Nazis. The
brutal German occupation still lives in Greek memories. The concept of national
self-determination is thus not an abstract concept to the Greeks. Its loss plus
austerity imposed by foreign powers would create a domestic crisis in which the
Greek state would be seen as an economic and political enemy of Greek national
interests along with the commissioner or some other mechanism. The political
result could be explosive.
It is unclear if the Greeks will opt not to default.
The certain price of default -- being forced to use their national currency
instead of the euro -- actually would increase national sovereignty. There will
be economic pain if the Greeks continue with the euro, and there will be
economic pain if the Greeks leave the euro; the political consequences of
losing sovereignty in the face of such pain could easily be overwhelming.
Default, while painful to Greece, might well be less painful than the
alternative.
The German Dilemma
The Germans are caught in a dilemma. On the one hand,
Germany is the last country in Europe that could afford general austerity in
troubled states and the resulting decline in demand. On the other hand, it
cannot simply tolerate Greek-style indifference to fiscal prudence. Germany
must have a structured solution that to some degree maintains demand in
countries such as Spain or Italy; Germans must show there are consequences to
not complying with the orderly handling of debt without default. Above all, the
Germans must preserve the European Union so they can enjoy a European
free-trade zone. There is thus an inherent tension between preserving the
system and imposing discipline.
Germany has decided to make an example of the Greeks.
The German public largely has bought into Berlin's narrative of Greek duplicity
and German innocence. German Chancellor Angela Merkel has needed to frame the
discussion this way, and she has succeeded. The degree to which the German
public is aware of the complexities or the consequences of a generalized
austerity for Germany is less clear. Merkel must now satisfy a German public
that questions bailouts and sees Greece as simply irresponsible. Capitulation
from Greece is necessary for her as a matter of domestic politics.
The German move into questions of sovereignty has
raised the stakes in the debt crisis dramatically. Even if the Germans simply
back off this demand, the Greek public has been reminded that Greek democracy
is effectively at stake. While Greece may have borrowed irresponsibly, if the
price of that behavior is yielding sovereignty to an unelected commissioner,
that price not only would challenge Greek principles, it would bring Europe to
a new crisis.
That crisis would be political, as the ongoing crisis
always has been. In the new crisis, sovereign debt issues turn into threats to
national independence and sovereignty. If you owe too much money and your
creditors distrust you, you lose the right to national self-determination on
the most important matters. Given that Germany was the historical nightmare for
most of Europe, and it is Germany that is pushing this doctrine, the outcome
could well be explosive. It could also be the opposite of what Germany needs.
Germany must have a free-trade zone in Europe. Germany
also needs robust demand in Europe. Germany also wants prudence in borrowing
practices. And Germany must not see a return to the anti-German feeling of
previous epochs. Those are several needs, and some of them are mutually
exclusive. In one way, the issue is Greece. But more and more, it is the
Germans that are the question mark. How far are they willing to go, and do they
fully understand their national interests? Increasingly, this crisis is ceasing
to be a Greek or Italian crisis. It is a crisis of the role Germany will play
in Europe in the future. The Germans hold many cards, and that's their problem:
With so many options, they must make hard decisions -- and that does not come
easily for postwar Germany.
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