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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

CNNMoney.com ran an article in July of 2010 on Illinois’ debt problem by likening Illinois to Greece. Rarely are states of the US compared to states of the EU. I suspect that comparisons between the American republics and European countries were more common during the first fifty years of the US, when—as in the EU in its first fifty years—most people living in the American states identified themselves principally with their country rather than as Americans. Aspiring politicans typically had their eyes on their respective state legislatures rather than on the Congress of the union because the states that formed the union held most of the domains of power and held the attachment of their respective citizens.  So it is in the early twenty-first century in the EU. Hence, I contend that the EU today is best compared with the US during its first fifty years rather than with its condition in the twenty-first century as a consolidated empire. 

Lest Europeans be too confident that the EU could never consolidate too, they might read Madison’s Notes on the Constitutional Convention, which report the certainty of the delegates that the peoples’ identification with their respective republics could be counted upon to restrain encroachments from the US level of governance. Of course, the state identification in the US has fellen away—though it is still more evident in Texas than say in Illinois. As strong as “nationalism” is now in Europe, Europeans would be wise not to rely on it in structuring their Union for future generations. It is indeed amazing how something so salient today can be so enervated tomorrow. We tend to project our day forward, when the sad fact is that three or four generations from now almost all of us will have been forgotten.

In terms of Illinois, in the middle of 2010 when Moody’s and Fitch downgraded its debt, the republic was on the way to assuming nearly $10 billion in sovereign debt for the year (yet, like Greece, without its own monetary policy). Unlike Greece, Illinois could not count on its Union for help—as the US itself was $13 tillion in debt and the stimulus money was ending at the end of 2010 (just after the midterm Congressional elections). The EU’s help itself reflects the federal balance in that union, as the state officials played an active role with EU officials in putting together the rescue package. The lack of such a balance in the US has contributed to Illinois’ financial condition.

After years of overspending, Illinois had as much as $6 billion in unpaid bills that left schools, social service agencies, and venders waiting months to be paid, according to the comptroller Daniel Hynes. “We’re leveraging our future and that’s not the correct approach, but it was what was chosen out of a lot of bad options,” Hynes told CNNMoney.com. Perhaps not many Illinoisians were aware of the structural imbalance, given their primary attention on matters of the US.  Because the debt problem has compromised Illinois (as the same problem has enervated Greece), the failure of Illinoisians to pay sufficient attention to their immediate republic can be linked to a further “downgrade” of it. Unlike Europeans, Americans cannot count on “nationalism” at the state level as a check in keeping their state officials “honest.” (Corruption in Illinois is indeed a problem)  Lest we take this difference to be enduring, we might remember that even seemingly-solid political attachments can shift radically even as the institutions remain.

In short, Illinois and Greece can be compared and contrasted on the particularities of their debt problems, and so can the EU and US as federal systems of public governance.  Avoiding category mistakes, like comparing Illinois to the EU, is a first step (which CNN has begun to avoid, albeit in small steps) to being able to compare and contrast in ways that do not result in faulty conclusions wherein apples are compared with oranges.  Yet from the vantage-point of the early twenty-first century, both in Europe and America, the category mistake still rules like a huge societal blind-spot. To compare the EU to the US (and any of their respective states with one of the other), it is most accurate to compare the EU now to the US during its first fifty years.  In a looser sense, a state of the EU is on the same level as one of the US, and the EU itself is on the same level as the US—the American colonies having been so in the Greek rather than the Roman sense (i.e., as replicating the home kingdom, rather than as a province thereof).

Source: http://money.cnn.com/2010/07/13/news/economy/illinois_debt/index.htm