While I agree with the former British Tory Cabinet minister Lord Tebbitt on nearly everything, his suggestion in the wake of the Greek crisis that the Eurozone needs a centralized finance minister, withdrawing all financial autonomy from its members appears misguided. Tebbitt is correct in that many of the more dirigiste Euro-bureaucrats would like such a thing, as a mechanism to further their own control of every aspect of human life. However, it’s really not necessary; all that is needed is for each Eurozone member, if it wishes to continue using the euro, to insert a balanced budget provision into its own constitution.

Greece’s misbehavior and the market panic that has resulted therefrom were both predictable, and indeed predicted at the time the euro was formed. The Stability Pact was violated in moderate ways too often by the leaders of the eurozone, so that it had by 2007 become a joke – hence Greece felt justified in entering into swap deals with Goldman Sachs, lying about its national accounts and generally behaving in a thoroughly underhanded way in order to subvert it. While the responsibility appeared to rest with the center-right government of Kostas Karamanlis, in reality it goes all the way back to Greece’s early years in the EU, when hard-left prime minister Andreas Papandreou, father of the current incumbent, used EU funds as a honeypot to prop up his corrupt regime and was allowed to get away with it.

Nevertheless, the answer to problems caused by one set of corrupt leftist politicians is not to impose another set of corrupt leftist politicians, with less accountability to any perceivable electorate. Control of Greece’s problems by EU bureaucrats would be very unpopular in Greece, as the bureaucrats imposed restrictions over which the Greeks had no control. It would also be economically damaging, as the bureaucrats imposed one statist solution after another on Greece’s problems, believing arrogantly in their own intellectual and ethical superiority, and failing to allow the market to work. You only have to look at most IMF interventions or World Bank aid programs to see how counterproductive such an approach would be.

There is however an alternative, which can be examined by considering the polity to which EU elites secretly consider themselves superior: the United States. The states of the United States initially formed a union that was significantly less centralized than the EU, with a single currency. They have however managed to avoid more than a few state defaults over 221 years, and there has been no direct federal bailout of a troubled state. It’s thus worth examining the differences between the two structures, to see whether lessons can be learned.

While the United States is currently far more economically integrated than the Eurozone, it has taken over 200 years to get there. Initially, while the differences of language were not as great as in Europe, those of communication were much greater. State budgets were much larger than the national budget, as is the case with individual EU national budgets today. Even though the US had a single currency, the dollar, and a payment system through the First and Second Bank of the United States, state economies were much more diverse in 1790 than are the EU economies today, and trade between them was correspondingly less. There is after all nothing that disrupts the creation of a single market for labor more completely than the institution of chattel slavery.

Nevertheless, for almost fifty years the early United States managed to thrive without any states defaulting, even though from time to time parts of the country were occupied by invading British, or were painstakingly being integrated after having been purchased from France.

The lack of defaults did not result from any moral superiority of that period’s politicians, who once you get beyond about six sanitized Founding Fathers were much as politicians have always been. Nor did it happen because of any greater feeling of responsibility in each state for the difficulties fiscal irresponsibility might cause other states – there was little love lost between them, and by the 1830s outright war was less than a generation away (presumably not now the case in the Eurozone!) Instead it was due to one simple structural fact: in all cases save Vermont, state constitutions mandated the state governments to balance the budget each year. Borrowing was then to be undertaken only for capital projects.

Of course in practice budget deficits occurred – for one thing the science of economic forecasting was non-existent, so when recessions occurred the first state governments knew was when whisky tax receipts dropped sharply. In those circumstances, states were forced to cut spending or raise taxes – the latter being highly unpopular with the voters. Thus politicians’ dreams of “Keynesian deficit spending” were possible only at the federal level.

This system can unstuck on only two major occasions. First, in 1836 Andrew Jackson refused to re-charter the Second Bank of the United States, thus decimating the money supply. This caused a massive and long-lasting recession, during which several states went into default, in one case, Mississippi, taking the state banking system with it. The second series of defaults occurred after the Civil War, when most of the Confederate states defaulted on their war debt. The only default since the 1880s has been a solitary event in 1933, when the state of Arkansas had issued too much highway debt going into the Great Depression, and ran out of money.

Since the Eurozone has currently a roughly similar level of integration to the early United States, the solution is clear: each country which wishes to be a member of the euro must pass a constitutional amendment mandating a balanced budget. Not a 3% of GDP deficit, balanced. Private sector auditors appointed by the European Central Bank would certify each country’s annual budget, but sovereignty would be otherwise completely unimpaired. There would be no necessity for EU inspectors to mandate tax levels, make unpopular spending cuts or make critical remarks about local politicians.

The budget-balancing would be done automatically, under the individual government’s constitution, with only the constitutional amendment itself being certified by the ECB as adequate. There would inevitably be a certain amount of backsliding, as there is in the United States, but there would be no possibility of states approaching dangerous levels of fiscal instability; the additional 3% of GDP discipline beyond the feeble Stability Pact, the impossibility of being “forgiven” for running a little over and the private sector nature of the audits would ensure that budget problems were quickly identified before they became a threat to fiscal soundness.

Any country that did not wish to balance its budget annually would have a perfectly simple recourse: it could leave the Eurozone, remaining in the outer fringe of the EU with its own currency. Its budget would then be entirely its own concern, and if it defaulted there would be no significant effect on the credit of the EU as a whole, since it would not be a member of the central group.

Apart from making Eurozone defaults practically impossible, this proposal would have a number of further advantages. It would prevent Keynesian deficit spending, thus allowing local private sectors to get as much as possible of what little finance was available in recessions. It would force national debt levels onto a steady downward track, as interest costs would be included in each year’s budget. Finally, and most important, it would ensure that each extravagant spending proposal at the national level would be accompanied by an immediate tax increase, thus making itself highly unpopular quite quickly. Indeed the need to economize periodically during recessions would ensure that the size of government remained under control.

The only difficulty would then be preventing the EU itself from metastasizing as did the federal government, inventing new functions for itself to carry out, and absorbing larger and larger fractions of Europe’s output. However this problem exists today. Certainly random bursts of Keynesian deficit spending at the European level would be impossible as long as sound German ideals of fiscal management were able to exercise a veto over them.

There’s a reason the states of the United States integrated fairly amicably, with the one great exception of the slavery question. The Founding Fathers, unlike the designers of the European constitution, did not attempt to meddle in every aspect of national life, but instead left the states in almost all respects self-governing. Only after a century or so, with the Progressive Era, did the economic functions of the center begin to overwhelm those of the states. Even now, over 200 years into its existence, the federal government is constrained by the Tenth Amendment (the equivalent of which does not exist in the 400-page EU constitution). The EU’s meddling in everyday life, by which grocers in Britain are arrested for not using the metric system, is constitutionally forbidden in the United States — the matter was decided in 1935, in the Schechter Poultry case, in which Federal regulation of the conditions under which poultry was sold locally was ruled unconstitutional.

The Greek budget problem is perfectly soluble, if the EU steps back and mandates only a simple balanced budget rule for membership of the Euro. (Greece itself should be ejected from the eurozone for bad behavior, and only allowed to return, with a balanced budget amendment, after a penance period of twenty years or so.)

But of course, that would prevent the closer “integration” by which the EU bureaucracy dreams of controlling everything within its borders. Once again, the EU thus proves itself to be a potentially workable and, with proper democratic accountability and consent, benign idea, utterly spoiled by the socialist heavy-handedness of its execution. Like Marxism in practice, the EU in its current form is a monstrosity, inimical to every idea of personal freedom. Unlike Marxism, it doesn’t need to be.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)