Greece's debt troubles strengthen the case for a fiscal union in Europe
Yan Shaohua says the debt crisis must serve as a lesson for the EU that a united monetary policy alone carries with it built-in drawbacks that only true integration can solve
The Greek debt crisis has evolved in a dramatic way over the past weeks. Despite a Greek referendum voting no to the reform proposal, the European creditors have insisted on even harsher austerity measures as precondition for a third bailout, which Greek Prime Minister Alexis Tsipras finally accepted with deep reservations.
The once-feared danger of a disastrous "Grexit" seems to be removed for the time being, yet how the bailout negotiation unfolds in the following weeks remains to be seen. No matter what comes out of the negotiation, the EU has important lessons to learn from this crisis, which has been rumbling on since 2010. And these lessons are as much political as they are economic.
A focal point of discussion is whether the doctrine of austerity measures works for the Greek economy. The European Union believes in it and blames Greece for failing in economic reform, but the debt crisis also points to a political problem that lies at the heart of the European project - a currency union without a common fiscal policy.
The adoption of the euro marked a bold and significant step in European integration. Under the monetary union, monetary policy is centralised under the authority of the European Central Bank, but fiscal policy (taxing and spending, etc.) remains largely in the hands of each country.
This institutional design has brought hidden troubles for both sides of the Greek issue. On the one hand, the European authorities do not have the means to effectively check the "health" of euro-zone members' fiscal conditions, which is illustrated by the fact that Greece managed to hide a huge budgetary deficit from European authorities, with the help of Goldman Sachs.
On the other hand, if euro-zone members do not follow a strict fiscal discipline and run into a debt crisis, they do not have the option of printing money to balance their budget, and have few options except to exit from the monetary union. This has been Greece's situation for the past five years.
As a result, the EU is facing not only an economic problem, but also a political one. The current institutional design of the monetary union contains built-in drawbacks, which have added to the tension between the Greek government and its creditors. While Tsipras refers to the creditors' harsh stance as "blackmailing", the European creditors criticise the behaviour of the Greek left-wing government as "irresponsible". This tension is eroding public confidence in the entire European project.
To get itself out of this trouble, the EU must learn its lessons from the Greek crisis. One of them is to put a political direction of the monetary union on the agenda, in addition to the economic reforms that it has demanded from Greece.
In fact, the EU is also using this crisis to tighten fiscal discipline and move towards a fiscal and political union. The creditors' tough stance on Greek reforms is criticised by some as intervention into domestic legislation, but this should also be read as a signal to Greece and other countries that the euro-zone fiscal rules are to be observed and strengthened.
During this crisis, the European institutions have actually taken steps gradually into the fiscal field by establishing the European Financial Stability Facility and the European Stability Mechanism. European Commission president Jean-Claude Junker's €315 billion investment plan is, in a way, a further step in this direction. Now the Greek crisis is probably going to strengthen the EU's appetite for a fiscal union. In a recent interview with , German Finance Minister Wolfgang Schäuble said the currency union has to move further towards a political union by strengthening the European Commission and the European Parliament.
To be sure, forming a fiscal and political union may meet with difficulties and challenges, considering the widely heterogeneous conditions of euro-zone economies. But if the currency union is to function better in the longer term, the political lessons from the Greek crisis cannot be ignored.