Posts tagged ‘Monetary Union’

11/03/2011

Greek Referendum: Democracy 101

After Greece joined the European Economic Community (1981), ratified the European Union Treaty (1992), and adopted the Euro currency as part of the EU Monetary Union (2002), they gave up their sovereign right to print money, or to spend in excess of limits set by the European Central Bank.

Although Greece was required by the Central Bank to maintain a Balanced Budget, and to limit their National Debt to no more than 60% of GDP, the Greeks failed to control spending, and their Debt rose well beyond the EU limits, to a crisis level.

Under the recent Greek Bailout Plan, promoted by the leading EU powers Germany and France, Greece was required to cut their budget in consideration for loan forgiveness and other assistance.

There was one small problem with the bailout plan: someone forgot to ask the Greek people if they approved. In the birthplace of democracy, the EU attempted to dictate from the top down, ignoring the principle that consent must come from the governed.

If Greek Prime Minister George Papandreou had allowed the EU to proceed without submitting a referendum to the people, seeking their approval, and draconian spending cuts were made without regards to the wishes of the people, a revolt may likely have erupted in Athens. It is naïve to assume Greeks would simply allow the Central Bank in Frankfurt to reduce their jobs and pensions without a fight.

Papandreou wisely realized the only way benefits could be cut and taxes can be raised in Greece is with the consent of a majority of the people. While the referendum poses risks, such as a vote that disapproves of the EU plan, observers must recognize that the absence of democratic participation would have led to an even greater risk of civil war, and at the very least, the violent removal of George Papandreou and his government.

The absolute best case scenario is for the Greek people to approve of the referendum so the EU plan has the will of the people behind it. We should not criticize George Papandreou for resorting to time-honored Greek democratic principles to solve this crisis.

10/26/2011

Greece Limited By Euro Monetary Union

Although the U.S. Congress controls Fiscal Policy under an unlimited Constitutional power to tax and spend, and Monetary Policy through the Federal Reserve Bank and the ability to “coin money,” European Union states, such as Greece, who elected by treaty to adopt the Euro currency, are no longer able to use a national Monetary Policy to print money, or a Fiscal Policy to spend in excess of limits set by the European Central Bank.

European unification has been a work in progress since the 1950s when certain European states created a Common Market for the purpose of trading, under a system that allowed them to maintain their control of over national economics. A Customs Union was added in 1968 to abolish tariffs between the member states, and to establish a common tariff as against goods from the outside.

The existence of several currencies and a desire for a easier flow of capital led to a Monetary Union, which created a European Central Bank in Frankfurt, abolished German Marks, French Francs, and other currencies, and replaced them with the Euro in 2002, by making it the exclusive legal tender in Euro Zone states.

The problem with the Monetary Union is the lack of a Political Union to oversee it. Unlike the U.S., where all 50 states obey Washington DC on national matters, the EU is a collection of independent countries that happen to have a Central Bank. The EU Parliament cannot pass national legislation, like the Congress; they can only follow existing treaties, or propose new ones.

It is doubtful the recent European Monetary Union financial crisis will cause the independent countries of the EU to form one Political Union. It is more likely to have the opposite effect.

The problem is national governments like Greece already gave up aspects of national control under prior EU Treaties. When the Monetary Union was made, the EU Framers required the various national governments to coordinate their economies. National Debt, for example, was not to exceed 60% of GDP. Countries that previously used Monetary Policy were no longer able to do so, since these powers were transferred by treaty to the Central Bank.

National governments that previously spent their way out of recession, now had their Fiscal Policies controlled by the EU Central Bank, which imposed spending caps. Their Stability and Growth Pact (1997) required states to pursue balanced budgetary policies, and imposed sanctions against those that failed to adjust.

The European Central Bank has the authority under treaty law to restrict the democratic wishes of the Greek people and to operate without regard to political pressures. The risk is a renunciation of the EU Treaty by Greece, which may trigger others to follow, in a manner like South Carolina’s secession from the U.S. in 1861.

While the EU is not going to allow member states to default, the question is whether the Greeks will allow the Central Bank to reduce their jobs and pensions without a secessionist revolt, which Greeks may feel is their only option, since the Bank now controls their national Monetary and Fiscal policies, under the EU Treaty.