The Beginning and End of Big Europe?

The Second World War in Europe ended 70 years ago Friday before last. VE Day (Victory in Europe) preceded by three months VJ day when Japan surrendered, and humanity’s most destructive conflict finally ended. The end of the war was the beginning of the postwar project of European reconciliation and integration. A collection of brilliant statesmen began the planning of what ultimately became the European Union. Their purpose was to so completely integrate Europe’s major powers (Germany, France and Britain), in particular economically, that it would ultimately become impossible for them to go to war with each other.

Since 1945, the European project has faced many challenges, starting with the Soviet post-war domination of Eastern Europe, which led to the Cold War and the creation of NATO. Despite the East-West tensions and the Iron Curtain dividing Europe, European economic ties became ever-stronger, with Great Britain acting as the grumpy cousin who did not want to play nice with the rest of the family. The European Economic Community was formed in 1957, the Western powers won the Cold War and the Berlin Wall fell in 1989, the EEC became the European Community in 1992, the common currency of the Euro began to circulate in 2002, and the European Union was formed in 2007.

Around the turn of the 21st century, the project began to hit some bumpy patches in the road. First, several countries said “No” in various languages to steps toward closer integration. Much of their discomfort arose out of recognition of the fundamentally undemocratic character of the EU’s emerging super-bureaucracy. But the most significant challenge to the EU since the adoption of the common currency in 2002 has been the slow-motion disintegration of Greece.

We know now that Greece never qualified for its 2001 admission to the Eurozone, defined as those countries using the common currency for all transactions, because it did not meet the explicit “convergence criteria” defined by the EU in the Maastricht Treaty. The Greek government engaged in deliberate fraud, cooking the national books with the aid of American investment bank Goldman Sachs, in order to conceal current account deficits far beyond those permitted by the convergence standards. (Greece reported a 1.5% deficit in 2003, below the required 3% threshold, but the real deficit was over 8.5%.) Athens used the benefits of membership to borrow lots of money at preferentially low rates, which was spent largely on social benefits for Greek’s public sector workers and retirees, and also received a great deal of development aid.

In 2010, Greece’s financial manipulations were revealed. It became clear that large amounts of Greek debt, borrowed under fraudulent pretenses from European banks, would not be paid on time if at all. At the beginning of the crisis, there was a real risk of contagion. Banks are leveraged entities, and writing off billions in loans, even to tiny Greece, could have endangered the European financial system, in a manner similar to how bad mortgage loans substantially decapitalized the U.S. banking sector in 2008-2009.

That is no longer the case. A Greek exit from the Euro, either on purpose (“Grexit”) or by accident (“Grexident”) would be a disaster for Greece, but it seems likely it would be an economic non-event for the other members of the EU. So why is Europe, ably led by Germany’s Angela Merkel, going to so much trouble to try to keep Greece in the Union, if not for economic reasons?

The reasons for retaining Greece within the EU are geopolitical and ultimately spiritual. Having gone 70 years without any armed conflict between major European powers is a blessing almost beyond price. If any member of the EU leaves, even one as feckless and underdeveloped as Greece, it calls the entire European experiment into question. The fact that Greece is cozying up to brutal, expansionist Russia is an immediate reminder of past tensions and conflicts.

How long can Merkel’s desire to keep intact Europe’s experiment in peaceful coexistence continue to trump everyone’s frustration with Greece’s serial follies? (Not least that of German voters, few of whom relish the prospect of providing perpetual subsidies to Greek pensioners and civil servants.)

Not, I suspect, much longer. Either Greece will substantially roll over on its refusal to reform its dysfunctional statist economy, or they are likely to be outside looking in by midsummer.

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