Is there a way to save the Greek people without saving the socialist government structure of Greece? Yes, according to an op-ed in today’s WSJ by UCLA economist Andrew Atkeson and my Hoover colleague John Cochrane.
When Europeans can put their money into well-diversified pan-European banks, protected from interference from national governments, inevitable sovereign defaults will not spark runs, or destroy local banks and economies.
It’s painful to imagine the innocent Greek worker who has only one option for saving her money — the local bank — which then tells that person she is no longer allowed access to her own money! The personal capital of the Greek people is being held hostage by their socialist government. Wow.
So is the right solution to give that government bailout money from the German people? The American people? The smart alternative is to allow the Greek people to save in any bank in the world, meaning that any bank in the world should be free to open branches in Athens and other Greek cities. As John has written before, this freedom is what makes government debt in Illinois and Puerto Rico different from Greece.
In Balance, we make a similar observation in Chapter 10 “Europa: Unity and Diversity.” Recognizing that too many issues are oversimplified as less-v-more and good-v-evil, the nature of freedom and the state is ambiguous on centralized authority. Parsing the degree of centralization that optimizes prosperity differs across different institutions: speech, banking, immigration, taxation, and so on. While we generally should err toward decentralization, John makes a case that monetary union (or rather, currency union) is a good thing. In Balance, we wrote,
One difference between European and American integration is much more fundamental, yet it has received little attention. …The bank account of a citizen in Lansing, Michigan, is not threatened by confiscation or default of the Michigan statehouse. That same security does not comfort the bank accounts of the people of Athens.
Critics have warned that a currency union without a fiscal union is inherently flawed. That is hogwash. Glenn and I described (on page 209) six distinct policy layers of economic integration.
- Monetary (aka Currency)
Too many experts think of integration as an all-or-nothing choice. They may favor incremental steps toward integration with trade agreements (as we do), but ultimately their bias is for ultimate integration of all layers (as we do not), especially fiscal union. Fiscal union can be benignly described as strong states subsidizing weaker/poorer states, but I hear that as glossy language for a full transfer of control over the authority to tax and spend.
There’s no need for any state to surrender fiscal authority to the central government. The fifth layer is far enough for optimal efficiency. That’s banking union, which is more properly understood as banking freedom from the perspective of individual citizens. Local cities and states do their people no favors by holding sovereign power to control and confiscate the private assets held in local banks. It’s nice to see Atkeson and Cochrne putting more attention and historical background on this issue. The final word is theirs:
The United States offers a precedent. … In the 1980s, the U.S. deregulated banks to allow extensive branch and interstate banking, further isolating local banks from local troubles.
… Europe needs well-diversified, pan-European banks, which must treat low-grade government debt just as gingerly as they treat low-grade corporate debt. Call it a banking union, or, better, open banking. The Greek tragedy can serve to revive the long-dormant but necessary completion of Europe’s admirable common-currency project.