Years ago, when the third and final phase of the economic and monetary union was to be implemented, an almost centennial Milton Friedman had strongly criticized the nascent currency of the euro. His criticism was based on a simple ascertainment - how would a common currency, to be used by an important number of countries, satisfactorily function without a political union?
Friedman passed away a few years after having declared that the EU should consider establishing a political union, or at least a deep political harmonization among member states before contemplating the use of a single currency. His criticism was not really justified during the first years of the euro. On the contrary, the "never-ending negotiations" tradition within the EU has helped to overcome a number of important problems. The euro steadily became a reference currency in world markets.
On the other hand, another Nobel laureate in economics, Paul Krugman, had another important reservation pertaining to the functioning of the euro. In his view, a common currency would be very important and useful in a homogenous market, where production factors circulate freely. But for Krugman, the European single market, despite the principles of free circulation embedded in its regulatory framework, did not have enough fluidity and mobility.
The crisis ignited by the Greek bankruptcy justifies both economists' critiques. First, Greece has grossly misused the "intergovernmental" structure of the EU by altering its public accounts, and by hiding the real situation of its finances it has created an inextricable situation. On the other hand, the absence of real free circulation within the EU did not help Greece to use labor mobility to compensate for rising unemployment at home.
But where Friedman was right - and Krugman, in his New York Times column emphasized a year ago - is the fact that in the absence of a political union, the "solidarity" shown is at best shallow. Yesterday, European Central Bank (ECB) Governor Mario Draghi declared that the ECB would not purchase Greek treasury bonds before the already bought bonds came to fruition. This is plainly to say that one more financial valve has been shut down for Greece in the coming months.
Greek Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis were already in a very delicate position regarding their insistence on having a new payment plan and to have new interlocutors different from the troika of the International Monetary Fund, ECB and the European Commission. They have been obliged to accept the previous arrangements between Greece and the EU. They were simply offered a four-month grace period that will be much more difficult than expected, as Draghi made clear.
Now this brings us to the example given by Krugman. When the U.S. state of Florida almost went bankrupt, the U.S. Federal Reserve extended an extra payment of $17 billion to cover up the payments. Obviously, Florida was never asked to reimburse this sum, so long as the U.S. is a single country, and then financial solidarity is a natural dimension of economic functioning. Whereas in the case of Greece, the incredible sum of 175 billion euros is to be reimbursed. Now, the EU either has to decide that the monetary union presupposes road accidents like Greece's, and bailing out member states cannot only be seen as a financial transaction and credit opening. Otherwise, the EU will have to profoundly alter its inner functioning by establishing stricter rules and regulations controlled by supranational authorities in order to really assess the economic situation of member states allowing some of them to exit the eurozone. This last alternative might be really bad news for Greece.