In early May, the European Union and International Monetary Fund offered roughly US$955 billion to debt-laden countries such as Spain and Portugal, but spending nearly a trillion dollars to avert a European debt crisis may have only created a deeper, existential crisis over European unity. A $146-billion bailout for Greece already sparked resentment among other European Union members. Germany, where the retirement age hiked from 65 to 67 in a bid for austerity, was displeased to bail out free-spending Greece, where retirement age is a mere 63. More troubling for the European Union are tensions between Germany and France, whose president Nicolas Sarkozy claimed credit for the bailout. “If that relationship’s endangered, it endangers the broader European idea,” says Thorsten Koeppl, a Queen’s University economist.
Yet the crisis might also force fiscal integration, starting with effective policy enforcement. EU guidelines stipulate deficits should not exceed 3% of GDP, but Greece had a deficit of 13.6% and Spain of 11.2%. “Until countries submit their budgets and they are approved or they are kicked out, then you haven’t really changed much in Europe,” says Andrew Busch, a strategist with BMO. But indebted states like Greece may leave the EU voluntarily, freeing them to devalue their currency rather than undertake austerity.