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At each stage of the seemingly endless expansion and integration of the European Union, the world is promised a more rational system will be installed for important functions like foreign policy, trade and setting interest rates. Yet each expansion added primarily fog to these processes, and now a crisis looms that may for the EU to look its hydra-headed self squarely in the mirror.
The unfolding Greek tragedy — that is, the collapse of global investor confidence in Greece's ability to pay its public debt — has revealed a huge flaw in the way Europe conducts its monetary and fiscal policies. Greece — and several other weak links collectively known as the PIIGS (Portugal, Italy, Ireland, Greece and Spain) — are in such poor fiscal health that they may have to be rescued by their richer cousins to the north (read: Germany and France). Everyone involved understands that the euro — which all of these countries share — is in peril, and that some of the basic understandings of what the European Union is all about has come into question.
And yet, muddle prevails. German, French and EU leaders have failed to speak convincingly about a rescue, at first foreswearing a bailout and brushing the IMF away when it offered help. Joaquin Almunia, the European Commission’s economics commissioner, blithely said “In the euro area … default does not exist.”
Au contrare, Sr. Almunia, default does indeed exist, and unless the EU takes decisive action, it also beckons.
Greece, an economic midget, when all is said and done, has been allowed to twist in the wind, subject to the same kind of battering from bond markets that ultimately took down the American investment banks Bear Stearns and Lehman Brothers two years ago. The world learned the hard way the dire consequences of a financial collapse of that magnitude.
At first, Germany and France appeared to think the problem would simply go away. But it will not. For political reasons, they don't want to offer any blanket bailout guarantees, and they keep referring to contraditory EU rules about whether they're on the hook if Greece or other weak economies go under.
Fact is, the hook is sunk in deep, and it's shaped like this: €.
In the end, few believe Brussels will allow Athens to go under — the threat of contagion to Portugal, Spain and other eurozone economies is too great. The current crisis in Greece is only the worst example inside the EU. The PIGS all boast public debt above or headed for 100 percent of GDP.
And, again, the problem isn’t confined to Europe. Dubai survived a scare in November only because its rich cousins in Abu Dhabi bailed it out. Japan and the United States, the world’s largest economies, also face pressing questions about their sovereign debt levels.
Japan reckons its public debt may peak at about 115 percent of GDP in the next six years. In the U.S., the Obama administration forecasts public debt to rise from 53 percent of GDP in 2009 to 77 percent in 2020. California's economy — larger than all but the largest EU economies — could be in default as early as next month.
Wake up. The crisis isn't over.