Two Failing States: Greece and California

The real economies of EU's members have become nearly as entwined as those of the American states and the initiation of the euro has led to a monetary system almost as unified as the dollar's realm.
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Bankruptcy happens. Default on paying the bills happens to people, to corporations, to cities and other governmental entities. It happens to sovereign states with weak economies in the less developed world, but in the developed world of Europe and North America it has happened only to the losers in world wars.

That may be about to change: two developed states -- Greece and California -- are in danger of default. The reasons are similar; the ultimate outcomes are not clear but present similar dilemmas which will have to be faced by the states but also by the larger organizations to which they belong, the European Union and the United States. And in spite of the differences between the two unions, the problems will be similar and immense.

Greece is in trouble because a right-wing government presiding over a not-very-strong economy overspent and undertaxed during the good times that preceded the Great Recession. The recession and the mess were inherited by a left-wing government which is trying to "do the right thing" by drastically reducing wages and benefits. In principle in a government with a parliamentary majority, that can be done, but the reductions will hit the government's own constituents without whose support it will collapse -- in a country with a tradition of going to the streets.

California is in trouble because both the Democrats and Republicans overspent and reduced taxes during the good times, and when tax revenues turned down with the recession, deficits ballooned. Rather than unified parliamentary government, California has U.S.-style checks and balances. And this is compounded by a structure of initiatives and referendums that undercuts the mandate for the governor and the legislature to balance the budget, substituting the natural impulses of voters to vote for good things but not for bad things (taxes) to pay for them. Add the requirement -- superglued into the constitution by initiative and referendum -- that a 2/3 vote of each of the two legislative houses is needed to pass a budget, and a reactionary Republican minority in both houses large enough to stalemate the Democratic majority and the moderate Republican governor; and paralysis is inevitable.

The only deus ex machina which might pull the two back from the brink would be rapid national and global economic recovery, and that seems quite unlikely.

So what happens when the brink is reached; when the money is not there to pay the bills? Somehow responsibility must fall on the larger organizations, the EU and U.S.

In the short history of the EU, national bankruptcy has not happened. In the longer modern history of Europe, it happened after World War I to Weimar Germany, with results over the next two decades not to be recommended for repetition. When it was about to happen after World War II, to allies and former Axis powers alike, nobody defaulted: immediate wisdom abrogated any expectation that bills would be paid; longer-term wisdom embodied in the Marshall Plan and the European Economic Community led to recovery and prosperity. In the even longer history of the United States, post-Civil War reconstruction was longer and nastier, but it did pull the south out economically.

The EU and the U.S. have many dissimilarities; but two relevant similarities.

The primary differences are that: politically, the EU has a weak constitution, the U.S. a very strong one. Economically, they are unlike in that the major taxing and spending power remains in the hands of EU's member states with only a small budget for the overall organization; over the centuries, the federal government of the U.S. has gained not only the larger share but much the largest power because the rest is divided among the 50 states.

But the two economic similarities are that: the real economies of EU's member states have become almost as entwined as those of the American States; and the initiation and embedding of the euro on the European continent has led to a monetary system almost as unified as the realm of the dollar.

The similarities mean that both organizations will have to respond to bankruptcies of members, but paradoxically, the differences may make it easier for EU to deal with Greece than for the U.S. to pull California back from the edge, particularly because California is a much larger portion of the whole.

Bailing out the indigents seems the only alternative to real political and economic chaos in the two unions. The weak European constitution means that Greece must be bailed out by EU's relatively strong members -- Germany, France, and outside the euro, the UK -- aided by the very conservative European Central Bank. All seem reluctantly likely to sign up, because of the dangers of the alternative. And, paradoxically, the flexibility of EU's weakness means that the bailers will be able to make, and enforce, reforms in Greece that can bring it back to equilibrium and prevent the problems from happening again.

But the constitutionally mandated relationship between the U.S. federal government and the states will make parallel action far more difficult. Were the federal government to simply allow California to stop paying its bills, national political and economic turmoil would surely result. Were the feds to pay and demand reforms, the chaos would be merely constitutional.

We Californians should pray for the deus.

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