Symβiosis aims to provide resources, commentaries and analysis, on political, social and cultural ideas and developments affecting change and policy, original and creative, based on arguments, able to propose and debate solutions to critical issues, maintaining a broad intellectual scope and global reach that readers need to understand the choices shaping lives, and reflecting on Greece, the Balkans, Europe and the world.

 

Comparing Greece and California: Toward a United States of Europe

gary-dymskiGreece and California are hugely different. California has more than three times as many people, and a GDP more than five times larger. These two places are far apart on the globe, and have very different linkages with the world economy. Nonetheless, both places’ circumstances have strikingly similar features. Both are in profound fiscal crises that threaten to destroy their social safety-nets and cohesion; and both are located in larger political entities whose circumstances are far more tranquil (if far from healthy). Further, both find themselves in a dilemma that was very well captured in a lyric from “Welcome to the Hotel California,” the 1976 hit of the California-based group The Eagles: “You can check-out any time you like, but you can never leave.”
 
The un-obvious comparison of the circumstances of Greece and California will permit us to see that if California’s solution is to rationalize its state’s governance, the only medium-term solution for Greece is to work toward the creation of a United States of Europe. Short of this, Greece’s exit from the Eurozone is a virtual necessary.

Greece finds itself with huge problems, in common with several other neighboring states in the Eurozone. Greece’s fiscal deficit as a share of GDP, its trade balance, and so on, closely resemble those of Portugal, Spain, and Italy, in particular, among the Euro-area nations. This has led some to construct the pointedly scandalous phrase, the “PIGS.”

However, these Southern European nations’ “structural deficits” on trade and on government expenditure is not surprising when we consider the overall Eurozone pattern of production and trade. High-productivity production and export capacity is monopolized by Germany and France, and lower-wage production and export capacity by other portions of the periphery of Europe.

If a balance-sheet of Europe is drawn up, these national “problems” disappear in an overall picture of Europe’s strength. But here there is a catch-22. If Europe remains strong, then the markets will evaluate Europe as a whole, thinking of individual nation-states as part of this entity. But if Europe fractures, then it’s every country for itself, and the nations with weaker positions will indeed have to adjust more – and will be riskier from a ‘solvency’ viewpoint – in future years. But what would it take to draw up and operationalize such a supra-national balance sheet?

But this raises the question: what is Europe? Is it the Euro? Is Germany being so cautious because it doesn’t want to reward a member country’s failure due to a lack of discipline, and because it doesn’t want to set a precedent – or both? Clearly. But if Greece is given an unworkable deal that will fail, why should the markets believe there is any better future ahead for Portugal or Spain? Recent evidence from France indicates that households and businesses there are now worried about whether the collapse of Europe’s house of cards will eventually flatten their nation.

Equating “saving Europe” with “saving the Euro by imposing fiscal discipline on individual member-states” is the basic error. To see why, let’s turn to California. California has had a revenue deficit of $20 billion or more for the past three years, on a baseline budget of about $100 billion. California has, further, built up a large volume of off-the-books debt – especially through revenue bonds – to such a high level that the state must commit about 6% of its spending to debt service and can borrow little more. Part of that debt was accumulated in 2003-04, when California borrowed $15 billion to cover a budget gap it was mandated, by law, to eliminate by year’s end. Given that state governments are mandated to balance their budgets, this behavior is that of a dysfunctional government. Consequently, The Economist magazine began suggesting California was a failed state with its June 10, 2009 issue.

California’s bad fiscal record has not led to a run on the US dollar; and there is no California dollar. Due to the existence of a unified federal budget, and to the ability of the federal government to print money if necessary, individual state deficits never trigger currency-market reactions. Indeed, state-level spending is only a portion of government spending within California. More important is federal spending. The federal government receives 55% of all government revenue collected within the borders of the US. It channels about 20% back to state and local governments, and spends the remainder directly. This money is of course channeled directly or indirectly to individuals and companies in every state, based on federal-government contracts and mandated (and voluntary) health, retirement, and other programs.

Higher-income states (such as California) receive less in federal revenue than their residents and business pay in; lower-income states receive more. California gets back about 78% of its pay-in. This ‘tax’ on California essentially assures more even prosperity in the United States as a whole. The federal government then directly distributes just under half of all government expenditures in the US, thereby maintaining the nation’s social safety net, its government health-insurance programs, and so on.

So what protects California is that it is a member of a 50-state dollar zone within whose borders a central bank creates as much liquidity as necessary to maintain growth and avoid excessive price inflation. California’s debt is marked down to near-junk status, and its ability to service that debt is increasingly precarious; but it does not have a currency which speculators can burn. Of course, the same is true of New York, Nevada, and other deficit states.

The situations of Greece and of California, then, present a clear contrast. Greece has shown a willingness to make whatever sacrifices are needed to get its budget deficit under control, including a willingness to open some contracts regarding pay and seniority. Greece has not been able to prevent a run on its debt-issue, however; it lacks an ability to print Euros; it has no other currency; and it is in no position to buy its way out of its problems by earning enough incremental Euros through trade. California, by contrast, has been able to sell its debt paper with relative ease.

California’s public sector has made many sacrifices in the past several years, but they have not been enough to resolve its deficit. This would require passing a tax increase; and California’s state constitution mandates that tax increases are permissible only with a 2/3 vote of the state legislature. Democrats have a large majority in the legislature – 64% – but lack the votes to pass such increases over the united Republican opposition. As a strong majority, Democrats have no will to cut social safety-net and education spending more than has been done already; but Republicans will not agree to meet them in the middle. Changing the 2/3-vote requirement would require a change in the state constitution, which would require a majority vote in a general election. So California is stuck due to a dilemma created by rules it imposed on itself, which angry voters have not been willing to change.

So both Greece and California have checked into different Hotel-California governance traps, which they have been unable to leave: Greece, because of political forces and economic structures in the rest of the Eurozone; California, because of its own angry voters.

Where, then, do these two crisis-ridden places go from here? California’s Governor Schwarzenegger has argued for larger infusions of federal money into California’s own governments; meanwhile, his state’s residents have been helped by higher federal spending levels. Californians should vote to change their constitution; but they may not, hoping instead that federal expenditures and the macroeconomy may pull them out of crisis. This is the California tragedy: by maintaining impossible hopes that the fates will smile on them eventually, Californians avoid hard choices now, making the hard choices that await them tomorrow all the more difficult.

Greece has had no choice but to take drastic action on its expenditures and taxes. That this was inevitable does not make it less tragic. The tragedy in the end is that these measures will buy Greece’s continued Eurozone membership via a steep price in stagnation, heightened inequality, and reduced public services. And if Greece proves able to stay in the Eurozone, speculators will not cease picking at the next national links in the chain. If Greece cannot, it is hard to see how not only Spain and Portugal, but even France can resist the centrifugal forces created by the need to reassert fiscal balance amidst macroeconomic deceleration and political stress.

The US example suggests a different path. In a functional union, dedicated to a minimal level of well-being throughout that union’s entire area, lower income subunits within a larger whole should receive net revenue transfusions from higher-income subunits. This cannot be problematized or made the subject of political discord. Again, the US case is helpful: many non-Californians in the US simultaneously envy and distrust Californians; and many Californians look on those living elsewhere in the US as clueless. Federal union does not make intra-national rivalries disappear; but it softens their sharp edges, as unified macroeconomic, fiscal, and monetary policies tie all Americans together, in the end.

The lessons here are clear. In a United States of Europe, nations like Greece would not be forced to balance all government spending within their borders: the question of how much public spending should be undertaken would be made in the European Parliament. Greece itself would only be required to balance whatever portion of overall government spending was directly controlled at the state level. Finance will have to be governed so as to keep speculators at bay. Megabanks and funds should not be permitted play short-term zero-sum ‘gotcha’ games while complex longer-term agreements are being reached.

At present, of course, this is a pipe-dream: the European Community’s cross-border spending comes to much less than half of all government spending in Europe, and even this has frequently triggered bitter complaints. But if this is a pipe-dream for Greece and for Europe at present, is there really any alternative if something called “Europe” is to survive as a coherent regional entity? And for Greece, is it worth fighting for anything less? If the answers to these questions are ‘no’, then an agenda emerges. The Greek government has to mobilize on three levels: it has to work with other threatened nations to come up with common goals and ideas; it has to work within the Euro framework on behalf of the threatened nations, and it has to mobilize the population to fight for a decent standard of life and the maintenance of a real social safety net.

Further, Greece must join with other nations being targeted by speculators, so as to reach agreement about a common proposal. For Portugal or Spain to side with Germany against Greece would be suicidal for the vision of “one Europe.” What is needed now is a strong, clear, honest conversation about whether “one Europe” can be crafted in the post-neoliberal world. It’s clear that the argument made here doesn’t end with “Europe” or “Brazil” or the US as privileged entities whose fates and macroeconomic steering mechanisms are immune from the current global trends of segmentation and stagnation. To the contrary. Speculators must be fought globally, and ultimately a global fiscal mechanism must be found. What is needed now is a strong, clear, honest conversation about whether “one Europe” can be crafted in the post-neoliberal world. It is a fervent hope that this conversation end by recognizing the benefits of a real union within Europe. This is not the end of things; we are far from the other bank of this river. Nonetheless, anything less invites disaster – for democracy, for leadership, and for the future of the world itself. No one can afford this now.

Source: www.re-public.gr

 

The un-obvious comparison of the circumstances of Greece and California will permit us to see that if California’s solution is to rationalize its state’s governance, the only medium-term solution for Greece is to work toward the creation of a United States of Europe. Short of this, Greece’s exit from the Eurozone is a virtual necessary.


Greece finds itself with huge problems, in common with several other neighboring states in the Eurozone. Greece’s fiscal deficit as a share of GDP, its trade balance, and so on, closely resemble those of Portugal, Spain, and Italy, in particular, among the Euro-area nations. This has led some to construct the pointedly scandalous phrase, the “PIGS.”


However, these Southern European nations’ “structural deficits” on trade and on government expenditure is not surprising when we consider the overall Eurozone pattern of production and trade. High-productivity production and export capacity is monopolized by Germany and France, and lower-wage production and export capacity by other portions of the periphery of Europe.


If a balance-sheet of Europe is drawn up, these national “problems” disappear in an overall picture of Europe’s strength. But here there is a catch-22. If Europe remains strong, then the markets will evaluate Europe as a whole, thinking of individual nation-states as part of this entity. But if Europe fractures, then it’s every country for itself, and the nations with weaker positions will indeed have to adjust more – and will be riskier from a ‘solvency’ viewpoint – in future years. But what would it take to draw up and operationalize such a supra-national balance sheet?


But this raises the question: what is Europe? Is it the Euro? Is Germany being so cautious because it doesn’t want to reward a member country’s failure due to a lack of discipline, and because it doesn’t want to set a precedent – or both? Clearly. But if Greece is given an unworkable deal that will fail, why should the markets believe there is any better future ahead for Portugal or Spain? Recent evidence from France indicates that households and businesses there are now worried about whether the collapse of Europe’s house of cards will eventually flatten their nation.


Equating “saving Europe” with “saving the Euro by imposing fiscal discipline on individual member-states” is the basic error. To see why, let’s turn to California. California has had a revenue deficit of $20 billion or more for the past three years, on a baseline budget of about $100 billion. California has, further, built up a large volume of off-the-books debt – especially through revenue bonds – to such a high level that the state must commit about 6% of its spending to debt service and can borrow little more. Part of that debt was accumulated in 2003-04, when California borrowed $15 billion to cover a budget gap it was mandated, by law, to eliminate by year’s end. Given that state governments are mandated to balance their budgets, this behavior is that of a dysfunctional government. Consequently, The Economist magazine began suggesting California was a failed state with its June 10, 2009 issue.


California’s bad fiscal record has not led to a run on the US dollar; and there is no California dollar. Due to the existence of a unified federal budget, and to the ability of the federal government to print money if necessary, individual state deficits never trigger currency-market reactions. Indeed, state-level spending is only a portion of government spending within California. More important is federal spending. The federal government receives 55% of all government revenue collected within the borders of the US. It channels about 20% back to state and local governments, and spends the remainder directly. This money is of course channeled directly or indirectly to individuals and companies in every state, based on federal-government contracts and mandated (and voluntary) health, retirement, and other programs.


Higher-income states (such as California) receive less in federal revenue than their residents and business pay in; lower-income states receive more. California gets back about 78% of its pay-in. This ‘tax’ on California essentially assures more even prosperity in the United States as a whole. The federal government then directly distributes just under half of all government expenditures in the US, thereby maintaining the nation’s social safety net, its government health-insurance programs, and so on.


So what protects California is that it is a member of a 50-state dollar zone within whose borders a central bank creates as much liquidity as necessary to maintain growth and avoid excessive price inflation. California’s debt is marked down to near-junk status, and its ability to service that debt is increasingly precarious; but it does not have a currency which speculators can burn. Of course, the same is true of New York, Nevada, and other deficit states.


The situations of Greece and of California, then, present a clear contrast. Greece has shown a willingness to make whatever sacrifices are needed to get its budget deficit under control, including a willingness to open some contracts regarding pay and seniority. Greece has not been able to prevent a run on its debt-issue, however; it lacks an ability to print Euros; it has no other currency; and it is in no position to buy its way out of its problems by earning enough incremental Euros through trade. California, by contrast, has been able to sell its debt paper with relative ease.


California’s public sector has made many sacrifices in the past several years, but they have not been enough to resolve its deficit. This would require passing a tax increase; and California’s state constitution mandates that tax increases are permissible only with a 2/3 vote of the state legislature. Democrats have a large majority in the legislature – 64% – but lack the votes to pass such increases over the united Republican opposition. As a strong majority, Democrats have no will to cut social safety-net and education spending more than has been done already; but Republicans will not agree to meet them in the middle. Changing the 2/3-vote requirement would require a change in the state constitution, which would require a majority vote in a general election. So California is stuck due to a dilemma created by rules it imposed on itself, which angry voters have not been willing to change.


So both Greece and California have checked into different Hotel-California governance traps, which they have been unable to leave: Greece, because of political forces and economic structures in the rest of the Eurozone; California, because of its own angry voters.

Where, then, do these two crisis-ridden places go from here? California’s Governor Schwarzenegger has argued for larger infusions of federal money into California’s own governments; meanwhile, his state’s residents have been helped by higher federal spending levels. Californians should vote to change their constitution; but they may not, hoping instead that federal expenditures and the macroeconomy may pull them out of crisis. This is the California tragedy: by maintaining impossible hopes that the fates will smile on them eventually, Californians avoid hard choices now, making the hard choices that await them tomorrow all the more difficult.


Greece has had no choice but to take drastic action on its expenditures and taxes. That this was inevitable does not make it less tragic. The tragedy in the end is that these measures will buy Greece’s continued Eurozone membership via a steep price in stagnation, heightened inequality, and reduced public services. And if Greece proves able to stay in the Eurozone, speculators will not cease picking at the next national links in the chain. If Greece cannot, it is hard to see how not only Spain and Portugal, but even France can resist the centrifugal forces created by the need to reassert fiscal balance amidst macroeconomic deceleration and political stress.


The US example suggests a different path. In a functional union, dedicated to a minimal level of well-being throughout that union’s entire area, lower income subunits within a larger whole should receive net revenue transfusions from higher-income subunits. This cannot be problematized or made the subject of political discord. Again, the US case is helpful: many non-Californians in the US simultaneously envy and distrust Californians; and many Californians look on those living elsewhere in the US as clueless. Federal union does not make intra-national rivalries disappear; but it softens their sharp edges, as unified macroeconomic, fiscal, and monetary policies tie all Americans together, in the end.


The lessons here are clear. In a United States of Europe, nations like Greece would not be forced to balance all government spending within their borders: the question of how much public spending should be undertaken would be made in the European Parliament. Greece itself would only be required to balance whatever portion of overall government spending was directly controlled at the state level. Finance will have to be governed so as to keep speculators at bay. Megabanks and funds should not be permitted play short-term zero-sum ‘gotcha’ games while complex longer-term agreements are being reached.


At present, of course, this is a pipe-dream: the European Community’s cross-border spending comes to much less than half of all government spending in Europe, and even this has frequently triggered bitter complaints. But if this is a pipe-dream for Greece and for Europe at present, is there really any alternative if something called “Europe” is to survive as a coherent regional entity? And for Greece, is it worth fighting for anything less? If the answers to these questions are ‘no’, then an agenda emerges. The Greek government has to mobilize on three levels: it has to work with other threatened nations to come up with common goals and ideas; it has to work within the Euro framework on behalf of the threatened nations, and it has to mobilize the population to fight for a decent standard of life and the maintenance of a real social safety net.


Further, Greece must join with other nations being targeted by speculators, so as to reach agreement about a common proposal. For Portugal or Spain to side with Germany against Greece would be suicidal for the vision of “one Europe.” What is needed now is a strong, clear, honest conversation about whether “one Europe” can be crafted in the post-neoliberal world. It’s clear that the argument made here doesn’t end with “Europe” or “Brazil” or the US as privileged entities whose fates and macroeconomic steering mechanisms are immune from the current global trends of segmentation and stagnation. To the contrary. Speculators must be fought globally, and ultimately a global fiscal mechanism must be found. What is needed now is a strong, clear, honest conversation about whether “one Europe” can be crafted in the post-neoliberal world. It is a fervent hope that this conversation end by recognizing the benefits of a real union within Europe. This is not the end of things; we are far from the other bank of this river. Nonetheless, anything less invites disaster – for democracy, for leadership, and for the future of the world itself. No one can afford this now.