Washington refuses to rescue near-bankrupt statesby C Randall Henning / June 20, 2012 / Leave a comment
Published in July 2012 issue of Prospect Magazine
Europe should look to America, where California’s crisis does not threaten the union
The euro crisis has now entered a decisive stage, a moment of truth for the governments of the troubled currency bloc. Countries with sound public finances, led by Germany and its chancellor Angela Merkel, have been demanding progressively more intrusive control over the budgets of crisis-stricken members to guarantee that their financial support will not be abused. In this debate about how far Europe should move towards federalism, European officials often allude to the financial constraints that the 50 states accept under the federal system of the United States.
But the comparisons risk misunderstanding the nature of the financial discipline at the heart of the American model. The plight of California offers some hope to Europeans: it shows that a union of many members can survive when some are profligate, and without resorting to bailouts by the financially stronger members, or by a central federal government. In all the anguished debate in California, there is no serious prospect that the US federal government will bail out the state. Nor does anybody in the US really doubt that California will remain part of the US monetary union—the dollar. But the second lesson demands further action from Europeans: this overall robustness, and the ability to be tough towards profligate members of the union, is possible only when the costs of government and of protecting banks are shared to a far greater degree than the eurozone has yet accepted.