The European Union is facing one of the worst economic crises of its life. The immediate trigger is Greece, which has been living well beyond its means. As the prospect of a default looms, the Athens government has pledged to embrace austerity measures, but public resistance is high. The Greek government has pinned its hopes on aid — read: bailout — from other EU governments, which worry about the precedent such a move could set as well as resistance from their own publics. An EU summit has cobbled together a response, but it is likely to only postpone the reckoning. Europe is in trouble.
Greece has been a poster child for profligacy. As The Economist, citing research, recently noted, "it has spent half of the last two centuries in default." Nevertheless, as a sign of its commitment to a united Europe — and Europe's commitment to Greece — the country adopted the euro nine years ago. That move was designed to force discipline on the country's economic decision makers. Adopting the euro meant that the Greek government was ceding control over economic matters to the European Central Bank: Being part of a continent-wide economic zone meant it could no longer print money to pay bills or devalue its currency to regain competitiveness. It was an ambitious undertaking: When Greece joined the euro, its public debt already exceeded 100 percent of its GDP.
At first, the strategy worked. Membership cloaked Greek decision-making with confidence. The government refinanced debt on easier terms. That also allowed the government to borrow more money. Government spending prodded the economy to higher levels, growing an average of 4 percent a year until 2008.