The Washington PostDemocracy Dies in Darkness

Why the Greece crisis could be the beginning of the end of Europe as we know it

(Simon Dawson/Bloomberg)

It started with coal and steel.

After the horrors of 1914 gave way to the even greater ones of 1939, France and West Germany tried to tie their economies so close together in 1951 that the continent could never turn into a slaughterhouse again. So along with Italy, Belgium, Luxembourg, and the Netherlands, they set up the European Coal and Steel Community to create a common market for those strategically-vital resources and head off any renewed rivalry. Six years later, that was expanded into a common market for everything else with the European Economic Community, and that in turn was expanded to include more and more countries before it became a part of the then-new European Union in 1993. The common currency came next in 1999, which has, yes, been expanded since, with Lithuania becoming its latest member just this year.

But now, for the first time in 60 years, this process of ever closer union might be reversing itself, at least a little. Greece really might be forced out of the euro if it doesn't come to terms with Europe by Sunday—that's the new and final deadline—and from there, who knows. It's possible this could actually make it easier for the rest of the euro zone to come even closer together, or it could be the beginning of the end of the dream of a United States of Europe. But in either case, the continent's political future is at stake.

What Greece looks like today

People stand in a queue to use an ATM of a bank as a person begs for alms, in Athens, Monday, July 13, 2015. Greece reached a deal with its European creditors Monday, pledging stringent austerity to avoid an exit from the euro. (AP Photo/Thanassis Stavrakis)

Now, the idea has always been that closer economic ties would lead to closer political ones. After all, you can't share a currency without also sharing a treasury. Why? Well, having the same currency means having the same monetary policy, but different countries need different monetary policies. France, for example, could use lower interest rates than Germany, and Greece could use a lower exchange rate than either of them. So to make up for the fact that money can't help but be too tight for some countries, the ones that are doing well need to send checks every year to the ones that aren't. That's what automatically happens in a well-functioning currency union like the dollar zone—aka the U.S.—where struggling states are able to pay less in federal taxes than they receive in federal benefits because strong states do the opposite.

The euro, in other words, was doomed to fail as it was constructed, but that failure was part of the plan. First you create a common currency that people want, and then, when the inevitable crisis comes, you have no choice but to create a common government that people don't—right? Well, no. The only thing less popular than a bailout is a bailout that never ends, which is what a fiscal union really is. Indeed, the Germans don't want to keep giving money to the Greeks, and the Greeks don't want to keep being told what to do by the Germans. So the irony is that the euro has made a single government more important than ever at the same time that it's made the idea more hated than ever.

This was so predictable that Milton Friedman predicted it back in 1997. The euro "would exacerbate political tensions," he said, "by converting divergent shocks that could have readily accommodated by exchange rate changes into divisive political issues." In other words, instead of being able to devalue your way out of trouble, you'd have to fight with your neighbors about how high interest rates should be or how much they should bail you out. But it's not just the politics between nations that turns nasty. It's the politics within nations, too. Keeping a country in a 1930s-style depression, like Greece has been, creates 1930s-style politics, complete with Nazis, communists, and fellow travelers of various stripes. And even the countries that are doing relatively better—which, in Finland's case, still means its longest recession in living memory—have seen bailout rage morph into rage against all outsiders, including immigrants.

It's reached the point that the euro might force Greece out of "Europe." Now the real problem, as many economists have pointed out, is that Greece likely never should have been part of the common currency to begin with, and has now been pushed into never-ending austerity that doesn't give it a chance to grow. But the more immediate one is that Greece's government has managed to lose friends and alienate people with its confrontational style—it's never a good idea to tell Germany they owe you World War II reparations at the same time you're asking them for a bailout—and Europe hasn't been willing to budge anything even resembling an inch for a government it doesn't trust. And that's why Greece might get all but kicked out of the euro.

So what happens if Greece does leave the euro? Well, it wouldn't be the kind of Lehman moment it might have been five years ago. The European Central Bank has seen to that by creating a financial firewall that should mean what happens in Greece, stays in Greece. And there's at least a chance that it could make it easier for the rest of the euro zone to agree to some kind of fiscal union. Greece really was sui generis in that its government's irresponsibility was what got it into trouble. That not only made it a convenient scapegoat, but also a convenient excuse not to do more to help the crisis countries.

But the more likely outcome is that nothing changes at first. The economics of the euro would still push countries towards a single government, and the politics of the euro would still push them away. Even if they're not Greek, all it takes to make someone seem undeserving of your money is to actually give it to them. So a fiscal union wouldn't be any more politically feasible than before. The bigger problem, though, is that Greece might show them there's a better life without the common currency.

Now let's be clear: the first year or two after leaving the euro would be complete hell. Unemployment would spike, inflation would too, bankruptcies would spread, and oil might need to be rationed. But that pain would pass, and when it did Greece would be left with a cheaper currency that would make its exports and tourism more competitive. Recovery would follow, and it could follow fast. That would be a reminder that even though devaluation is disparaged as the easy way out, its underrated virtue is that it is, in fact, a way out. Europe's been looking for one of those for years, so the next time an anti-austerity party won power, it might decide to do the same—until the euro zone was more like a northern euro zone, if that.

The euro's original sin is that it tries to force countries into a single government when the people in those countries don't want one. That not only makes them want one even less, but also makes them fight when they had no reason to before. But as long as nobody leaves, everybody is too afraid to do so even though they might want to. That's why whether Greece remains in or is removed from the common currency matters so much for the future of Europe. If it stays, then there's at least a chance that they could muddle through and, over the next few decades, forge a United States of Europe. But if it leaves, then more might too, and the euro might become the Esperanto of currencies: something that was supposed to bring people together, but didn't.

Speaking at a campaign event in Iowa City, Iowa, Democratic presidential candidate Hillary Clinton expressed her hope for a solution that keeps Greece in the euro zone, despite the country’s financial woes. (Video: Reuters)