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In the wake of Greece’s announcement that it would indeed need a bailout, Angela Merkel’s coalition partners suddenly got cold feet. Germany was slated to provide 8.4 billion euros out of the EU’s total contribution of 30 billion. Leaders of the FDP feared that the payout would ruin that party’s hopes of providing tax relief.  The German Foreign Minister Guido Westerwelle,told ZDF television, “It has yet to be agreed that Greece will actually get assistance from Europe at all.” He added: “We will not write a blank cheque”. FDP deputy leader Andreas Pinkwart said it would be “a slap in the face of German employees” if the government would give billions of euros to Athens, and tell Germans “there’s no money left for easing their tax burden.” The FDP’s  finance expert Hermann Otto Solms also criticized Finance Minister Schaeuble’s plans. “It was wrong to put the pot of honey in the middle of the table right from the start,” he said. “That was a signal for the Greeks to just help themselves.” The right thing to do would have been to offer Greece no help and direct them straight to the IMF, Solms told the Passauer Neue Presse daily.
The government’s role in the rescue package also received criticism from Chancellor Merkel’s second coalition partner, the CSU party, which is based in the region of Bavaria. CSU parliamentary leader Hans-Peter Friedrich said his party would prefer Athens to leave the eurozone and solve its problems by “re-introducing its former national currency, the Drachme, at a devalued rate of exchange.”  Friedrich’s opinion was echoed by economist Joachim Starbaty from Tuebingen University. Greece was “no longer competitive within the eurozone,” he said. “It’s impossible for the country to repay its debts and the loans it now receives because its economy will be unable to accumulate surpluses for a long time “, he said. “Devaluing a national currency is the only chance for Greece to regain its competitiveness. Starbaty announced he would lodge an official complaint with Germany’s Constitutional Court should parliament in Berlin give the green light to the bailout package.

However, the German financial houses were very powerful at the time, and they could have pushed Merkel into going ahead with the deal anyway. Germany’s financial institutions held some €28 billion, or $37 billion, in Greek bonds.  About half of it had been downgraded by S & P to junk.  Indeed, 14 billion is more than the 8.3 billion that Germany is set to pay as part of the EU rescue. Deutsche Bank’s chief financial officer, Stefan Krause, indicated that the bank would feel the effects of a deeper Greek crisis. “We don’t have much exposure to Greece directly. We are not concerned,” Mr. Krause said during a conference call with analysts. He added, “We could not completely isolate ourselves if the situation gets worse.”

Analysis:

Germany’s direct exposure to Greek debt provides another reason why the Greece's financial problems were very much Europe’s problems. “It’s not just a question of paying for Greece’s luxury pensions. There are intrinsically strong German interests as well,” said Alessandro Leipold, former acting director of the I.M.F.’s European Department. Even so, the politics within Germany shouldn’t be ignored either. The ability of one state to pull out of the EU’s attempted bailout of another of its states illustrates the EU’s vulnerability in having so much authority continue to reside with the state governments.  Ultimately, the risk is one of dissolution of the union.  To be sure, giving the EU too much power would risk consolidation–something that the US is in risk of “achieving.”  The trick is to create and perpetuate a federal balance of power, wherein the two governments for each bit of territory can check each other.  The FDP’s interest in giving the residents in the state of Germany tax relief suggests that states will indeed look out for themselves at the expense of other states, even if one is going bankrupt.  Starbaty’s reference to the “eurozone” ignores that the EU is not just a “zone” wherein there is the euro currency.  Even for the states having the euro, the EU is much more.  In fact, becuase the EU’s ECJ (European Court of Justice) has decided that EU basic law trumps state basic law, it is not clear to me that the  Starbaty is going to the correct court.  That is, an EU court has the jurisdiction to decide on the EU’s assistance to one of its states, even if the EU is counting on its state governments for the funding.  There has been such reliance in US history, and as Hamilton attested, it did not work out well.  Unfortunately, getting away from that problem led the US on a track too close to consolidation.  

Perhaps the US and EU can learn from each other.  The EU is now where the US was in its first fifty or so years.  That is, the EU has passed the Articles of Confederation stage, as the Articles did not have a legislature (i.e., EU Parliament), a President, an executive branch (i.e., the European Commission), and a supreme court (i.e., the ECJ).  Even so, the EU’s governmental institutions are weak relative to those of the states.  This makes it difficult for the EU to effectively respond to a crisis in one of its states because another state, such as Germany, can thwart a viable solution.  In short, the EU needs to move closer to the middle in achieving a federal balance of power.  As the US has already overshot it, perhaps the EU can showcase how federalism at the empire level (i.e., a union consisting of nation-states) can work.

Sources:
http://www.dw-world.de/dw/article/0,,5506597,00.html ; http://www.nytimes.com/2010/04/29/business/global/29banks.html?pagewanted=1

Ask a European if the E.U. government could ever consolidate power from the state governments and you would probably get a "nope (or nein, or non), we identity with our respective countries." The problem is, such attachments can change. Europeans would do well to look at the first hundred or so years of the U.S. to get a sense of how the E.U., too, could change. 

On June 18, 1787, in the U.S. constitutional convention, Hamilton pointed to “(a)n habitual attachment of the people. The whole force of this tie is on the side of the State Govt. Its sovereignty is immediately before the eyes of the people: its protection is immediately enjoyed by them.” (James Madison, Notes , p. 131) Hamilton concluded that the people would protect their respective countries from encroachment from the new general (i.e, federal) government. Back on June 20th at the convention, Luther Martin (not Martin Luther!) had pointed out, “(a)t the separation from the British Empire, the people of America preferred the establishment of themselves into thirteen separate sovereignties instead of incorporating themselves into one: to these they look up for the security of their lives, liberties & properties. . . . the sovereignties of the particular States which the Union was meant to support.” (James Madison, Notes, p. 159) The people set their respective ex-colonies, whose legislatures had largely been self-governing in various periods in the seventeenth century, as countries equivalent to those in Europe. The implication from Martin's argument is that the people had enough of a sense of nationalism to protect their countries from a general continental government. At Virginia's convention ratifying the U.S. constitution, Patrick Henry thus said, “I consider myself as the servant of the people of this Commonwealth.” (Storing, p. 295) Hence, Madison writes that the ratification of the U.S. Constitution “is to be given by the people, not as individuals composing one entire nation; but as composing the distinct and independent States to which they respectively belong.” (James Madison, Federalist #39, in Cooke, p. 254)

In spite of the apparent fixed nature of the attachments of the people favoring their respective countries at the time the U.S. constitution was being debated and ratified, such affinities should not have been counted on as a check against encroachments by the general government of the union. The fact that they were can explain why the U.S. constitution contains more checks against encroachments by the state governments than by the federal government. Melancton Smith, in a speech delivered at the New York ratifying convention, picked up on the error: “(a)n honorable gentleman from New-York [i.e., Hamilton] observed . . . that the states would always maintain their importance and authority, on account of their superior influence over the people.. . . But I ask him, how long the people will retain their confidence for two thousand representatives, who shall meet once in a year to make laws for regulating the heighth [sic] of your fences and the repairing of your roads?" (Storing, p. 349) Smith foresaw from the imbalance of checks in the proposed constitution that the general government would win the struggle for power at the expense of the state government.  Smith continued, “the powers of the confederacy will swallow up those of the members." (Storing, p. 354)   Smith then pointed to the finite duration of the primary political identifications of the people with their countries. "I do not suppose that this effect will be brought about suddenly—As long as the people feel universally and strongly attached to the state governments, Congress will not be able to accomplish it; If they act prudently, their powers will operate and be increased by degrees.” (Ibid.)  As it turned out, Smith was correct; the state attachments waned, which in turn facilitated Congress in usurping state prorogatives. Rather than being dissuaded or halted by the people, members of Congress could promise the people goodies from federal programs. Since 1913, U.S. Senators have been elected by the people of the states rather than appointed as delegates of the state governments.  This "reform," while in line with immediate representative democracy, left the state governments unable to act directly in the general government to arrest the encroachments.  As a result, American federalism came to lose that balance of power between governments that is necessary and sufficient for both the systems of the U.S. Government and the state governments to be checked by the other. For while the general government can still check abuses in any state government, the state governments--even working together--can no longer check federal abuses.  Hence the system of federalism is broken.

Europeans in the early decades of the twenty-first century would be wise to remember the American experience in assessing whether they have built-in sufficient safeguards against consolidation. What seems so strong today may be gone tomorrow.  Attachments are fleeting. As per Ecclesiastes 1:1-11, everything in our domain is fleeting; all is vanity. It is prideful indeed to presume the conditions of one's own day are somehow permanent--and ever worse, to be counted on by future generations. Once the artifacts of one's age are qualified or bracketed, the E.U. federal system can be examined in itself--in its structure or design. An assessment can be made on whether the checks against encroachments from either the state governments or the E.U. government are sufficient and in balance.

Dual sovereignty is not sufficient for modern federalism; there must be a certain balance of authority and power, or consolidation (or dissolution) will surely result.  Europeans like to point to the long history of their state governments to argue that the nationalisms in the E.U. will be reliable checks on an E.U. central state in the future. I counter that Europeans would be wise to look at the history of the United States--comparing that union in its first hundred or so years with the E.U. in the early twenty-first century. This approach is preferable to simply relying on momentary attachments that benefit from an assumed weight of European history. European empires gave rise to the empire that is now comprised of fifty united (i.e., nearly consolidated) states; now the latter can give back by providing a lesson of what not to do. I suspect that only pride can get in the way.

Sources:  James Madison, Notes in the Federal Convention of 1787. New York: Norton, 1987; Herbert J. Storing, ed., The Anti-Federalist, Chicago: University of Chicago Press, 1985; Cooke, Jacob E., ed. The Federalist, Hanover, N.H.: Wesleyan University Press, 1961.