In this Foreign Affairs Unedited podcast, Kathleen McNamara, author of the recent book The Politics of Everyday Europe discusses the future of the EU with Foreign Affairs Staff Editor Nikita Lalwani.

Read more by Kathleen McNamara here.

This interview has been edited and condensed. A rush transcript is below.

Nikita Lalwani: I thought maybe we'd just start with the latest news out of Greece. Two days ago, on August 11th, Greece announced that it had reached a deal for a third bailout, which would provide a drop to 86 billion Euros in exchange for Greece imposing harsh austerity measures. Is this good news?

Kathleen McNamara: I think it is good news. I think the worst possible thing would be to have Greece walking away, having the European Union leaders walking away from efforts to engage with each other and come to some kind of ongoing relationship. Obviously Greece has a tough road ahead of it, but I think, by and large, the sorts of structural reforms that were required and asked for by the European Union are reforms that I think a lot of the Greek people would probably be supportive of anyway. I think the big question is whether we're going to see more debt relief for Greece in terms of the money that it's borrowed.

Lalwani: Right. So there's been a huge debate in recent weeks about who's "at fault" for the crisis. The creditor nations blame Greece obviously, and many Greeks blame the austerity measures that they feel were forced upon them. What do you make of this debate?

McNamara: I think there's plenty of blame to go around, and I think actually a lot of the folks who have been studying this situation and thinking it through for a long time, most of the reasonable people tend to see that it takes two to tango, it takes two to create bad debts, both the lender, right? The folks that during the Go-Go Years of the 2000s sort of really put their suspicions aside and lent to countries like Greece, lent to banks within Greece, lent to people that shouldn't be taking out such big loans.

Clearly there was a lot of misjudgments. There were a lot of people that made money during that time. But on the other side, of course, you have the Greeks on their side being irresponsible in a lot of ways, and I tend to call it the sort of this magical thinking that they're not actually acting responsibly. So I tend to really see it as a blame both on the side of Greece and on some of the Northern European countries that were very much actively lending to the Greeks.

Lalwani: In terms of the two sides sharing blame, what exactly could each of them have done differently?

McNamara: That is a great question. When you look historically at financial crises when it's not given to a lot of optimism, unfortunately. There's a terrific book by Ken Rogoff and Carmen Reinhart called, 'This Time is Different,' which talks about historically various types of sovereign debt crises and financial crises, and they find, just as in the case of the Greek crisis, that again and again investors and speculators will get into situations sort of really putting aside, if you like, a more sort of rational view of what's going on in the hopes of making a lot of money quickly, right?

And so, we tend to see these speculative bubbles arising. This wonderful economic historian Charles Kindleberger, called financial crises a hardy perennial, that they always sort of come back. He argued that we see them about every eight years on average historically for hundreds of years, so clearly it would have been a good idea if people did not chase the money quite so spectacularly just as we did in the United States with the subprime mortgage crisis. But on the other hand, I think there are some enduring problems that the Greek political economy has that I'm hoping we're going to see more movement on than we have in the past because of the crisis and the way that the European Union and the IMF have played a big role in trying to navigate the crisis.

Lalwani: What sorts of endemic problems are you talking about in particular?

McNamara: So Greece in many ways is not as modern and developed a political economy as we see really across the rest of the European Union. The problems are that the Greek government is not really providing the kinds of public goods that we see provided in most other advanced political economy situations. Instead there's a lot of cronyism and clientelism such that the Greek government is really not providing for a clear and transparent role-based types of activities. It's, if you like, a somewhat corrupt system unfortunately, and I think that the Greek people are really at the end of their rope, and I'm hoping that they'll really demand more reform.

Lalwani: Do you think that under current Greek leadership that these kinds of problems can actually be solved?

McNamara: Well. [chuckle] Unfortunately, in politics there's no magic wand, and I think a lot of the writing about the Greek crisis, sometimes imagines that we can just rationally design a whole set of new institutions for Greece, and a whole set of new institutions for the EU and the Euro. We know historically, that change and transformation politically occurs slowly; it often occurs with a huge amount of conflict. Historically again, I would say, that changes occur at the point of the bayonet, or under a tank, right?

That we tend to see big changes and regime change occurring only in the context of war and violence. But I'm really hoping that Alexis Tsipras, the head of the Greek Government, has learned his lesson, having gone throu7gh this terrible crisis, when they walked away from negotiations a month or two ago. I think he's ready to come back to the table, ready to work and roll up his sleeves. So, I'm hoping that we're gonna see some progress.

Lalwani: Yeah, and so, on the other side of things, Germany has also come under a lot of flack for its leadership during the crisis. I'm curious what you make of German leadership during the crisis? What could have been done better there?

McNamara: Boy, that's a real interesting puzzle, I think. Because historically, Germany has been such an important engine for European integration. The Germans, coming out of World War II, really saw the creation of a European Union, originally around the pooling of coal and steel in the Coal and Steel Union, as a way for Germany to rehabilitate itself, and to bind itself to the rest of Europe, so that it wouldn't spiral off into another regime that would cause yet another world war. So, Germany has historically been an incredibly strong supporter of European unity and pretty much done whatever it had to do, to keep the European institutions together. So, Angela Merkel has really broken that mold, and stepped away from that. And she's the first German leader in the post-war era to take such a hard line. So a lot of us are wondering what this implies for the future of Europe, and what Germany's new role might be.

Lalwani: I guess, obviously, that's a difficult question, but do you have any ideas of what Germany's role could, or might be?

McNamara: I think that Germany is maybe evolving in a way that shouldn't surprise us that much. I mean, the memories of World War II are certainly fading. That whole generation that came out of World War II, and had vivid memories of it, that political generation is really gone now, so we should expect a change. Angela Merkel, herself, of course, comes from eastern Germany. She was not socialized and brought up in that tradition of people like Helmut Kohl, and so on, who were such strong leaders for the EU. So, I think she's trying to feel her way forward.

I think the other thing, maybe, that's very important to keep in mind, is that the Germans do have a very particular ideology around economic policy. I think that's played in here very strongly as well. The Germans, coming out of World War II, or the inter-war period, when they had this terrible, terrible inflation that destroyed their economy and made Hitler's rise possible, really. They had been this incredibly sober, orthodox, low inflation, price stability, whatever it takes, right, to keep your books balanced. That was their history for the entire post-war period. So, I think that when Merkel and her advisors, and the German people, look at a case like Greece, there's really a cultural clash there, and it's really difficult for them to figure out, that in fact, Germany's interests are served by helping Greece, because Germany, in fact, as I mentioned, the German banks and so on, were heavily involved in the Greek economy, and stabilizing Greece is good for the EU and good for Germany.

Lalwani: So actually moving back to Greece for a moment, I'm curious where you stand on the possibility of a Grexit. Obviously there's been a back and forth between those that say that Greece leaving the Eurozone would be catastrophic, and those who say that the Eurozone would actually be fine, or better off without Greece.

McNamara: Right, right. Yeah, I mean, those are all really good questions, and I think a lot of it comes down to who's interests are you... Do you wanna protect? I think one of the most interesting things that's come out of the last six months or so, of the crisis, or the reinvigorated crisis around Greece, is that it does appear that investors have decided that Greece is something different from the rest of the Eurozone. That in fact, Greece can walk away from negotiations and look like it's about to default and leave the Eurozone.

And we didn't see pressure on the prices that were charged for borrowing, in countries like Spain, Portugal, Italy, and so on. It seems that investors have decided that the Eurozone can be perfectly fine without Greece, and that originally these fears of contagion, that if Greece falls, it will be like dominoes, and the other Mediterranean countries that have had problems with their deficits and their debts would also go. I think we've seen that investors have changed their mind about that, and have separated Greece out from the pack. So, I think the Eurozone could be fine without Greece.

The question is, right, how would Greece do without the Eurozone? And there, there's no good options; before Greece joined the Euro, when they had their Drachma, they were definitely prone to lot of inflationary spirals, depreciation on world markets, which sounds great if you're exporting a lot of things, or for us as American tourists going to Greece, wouldn't it be great to have a really cheap Drachma, right? It would be fantastic.

But for Greece that has to import so many things, so many basic things including, of course, oil and so on, a very depreciated or low valued currency, can be very, very difficult. Their balance of payments gets out of whack and so on. And then it becomes very difficult to borrow money, right? Because, again, international markets are gonna sort of look at this country and say, they've a very unstable currency, and they have so much inflation, etcetera.

So, life without the Euro is not a pretty prospect for Greece. So, at times over this multi year, slow train wreck that has been the Eurozone crisis. I've definitely thought to myself, "Amputate and cauterize, get rid of Greece. This is just... It's hurting everyone; it's sort of so drawn out; it can't be good for the Greek people. It's not good for the European Union." But I'm hoping that this new round of negotiations and the sort of effects of this very dramatic crisis that we saw over the last couple of months are putting the Greek reforms on a new footing. But again, I would like to see a lot more debt relief for Greece coming out of the European creditors. So, we'll see. Yeah, I think that's the best possible scenario.

Lalwani: So, you say in the piece that you just wrote for Foreign Affairs, you say pretty explicitly that no matter what happens with the Greek deal, the EU is not collapsing. Its policies, institutions, and laws are just too deeply embedded in everyday Europe. And it sounds like from what you're saying that worst case, a Greek exit might not be so bad because it's a relatively peripheral country. But I'm curious what you make of the UK where there's going to be a referendum on EU membership? Could the union survive a Brexit?

McNamara: Yes, it absolutely could. And again, I think this is... These are all... One of the fascinating things that's great about studying the EU is this is all unprecedented stuff; we've never sort of seen exact parallels to the things that we're seeing happen with the EU. So, it's always hard to figure out how would people respond to these different scenarios. As I said, I think, the Greek scenario, the worst case scenario of Grexit, now people are sort of comfortable with. Brexit, I also feel is starting to become something that, at least, the Continental Europeans, plus maybe Ireland, I think everybody is starting to get comfortable with that idea, too. I was in Paris and London in July and talking to lot of people, and there seems to be a sense that the British have been quite... I wouldn't say unreliable, but let's not say they have been somewhat weak partners to the European project, in general, right?

So, some people are sort of saying, "Well, you know, let them leave. They're sort of a pain anyway." Let them be part of some sort of free trader, or European free trader, that sort of thing that the core of Europe will in fact be very robust and do fine. But again, then the question is, what are the gains and losses for the British?

If Britain leaves the EU, it's no longer part of that broader structure of governance. And that... It's like for us, our interstate commerce clause, really allowed the American market to become fully integrated. If Britain steps away from the network of laws that support the single market that are all adjudicated in the European Court of Justice, which is the EU Supreme Court. I mean the laws are supreme over national law. If Britain leaves that, then it really becomes much more like an international trading partner with the EU and it's very disadvantaged. So, I think that we're gonna see a big fight when businesses in the UK realize that this may truly be on the table.

Lalwani: Do you think a Brexit is likely?

McNamara:: I would not have thought it was likely three or four years ago, because again, the sort of economic benefits are just so overwhelming for Britain. And the sort of political demands really are not that great, right? I mean, I think they're more sort of identity and symbolic and that sort of thing. But I think Cameron really has been flirting quite dangerously, if he wants to stay within the EU, with this national referendum.

Now, referendum are impossible to control. If you decide to have a referendum, you never know when people go into the voting booth on that day, what they're really gonna be voting about. So, I think he's actually set Britain up for a much higher possibility of Brexit than I ever would have thought. But you have to check back with me I think in a few more months, and we'll see how the tea leaves look.


Lalwani: The way the Eurozone is set up now, it basically seems like no one is happy. Germany feels like it's bailing everyone out, the debtor nations feel like they're being forced to implement measures that they don't agree with. Can the Eurozone survive in its current form? Does it need to be changed or reformed?

McNamara: Yeah. When I first started studying the Euro, and I was learning about the European Central Bank many, many years ago, people would joke that the European Central Bank has a "one size fits none" policy, that it's so difficult to find the right balance of these different kinds of goals. But I think that your question actually gets to the heart of it. That the Eurozone, in order to survive, will actually have to move forward, deepen its institutions, develop some new governance mechanisms, particularly in the area of fiscal union. It's already gone forward with banking union and having a single set of rules and regulations around banking. But we're gonna have to see, I think, more deepening of the structures that allow a political economy to be governed in a democratic way.

Lalwani: So going off that actually, you've written elsewhere that the design of the Eurozone, is notably different from every other successful single currency in history. In that, the monetary union is, you say, "dis-embedded" from the broader social and political institutions, and you suggest that fixing the Eurozone will require a political solution rather than a merely economic one. So what could that look like?

McNamara: I think you summarized my argument really well. The key, though, is thinking through why it is that the Euro is so different from all these other examples of successful single currencies. And the difference of course is that the other examples historically have come about because they're part of larger state-building projects. They're part of political projects where power is wrestled to the center of a polity, usually having to stamp out other sources of rule and politics and power, so you have Bismark uniting Germany and creating a single currency out of all the different duchies that had been there before. Garibaldi unifying Italy, for example. In the US case, Lincoln is able to get a single currency only during the Civil War, in the US case. So the EU is fascinating because it has developed somehow and in a peaceful way, through laws, through agreements and so on, but I think that peaceful development has actually created a much weaker set of institutions at the center, as we've seen historically. So the question is, are these series of crises enough for us to see more movement of power to the EU level, or does the EU have to try to continue to be this fascinating hybrid of assertive federal system, but one with incredibly strong sub-units, which of course are the nation states of the European Union?

Lalwani: In your piece, you outline a number of ways in which the US currency union differs from Europe's. Obviously, debt is mutualized, and there is a collective social safety net that kicks into gear whenever a certain region, a given region is in trouble. Do you think is it unrealistic, is it a pipe dream to hope that the EU could emulate the US in any of these ways?

McNamara: Yeah. That is really the big question, and I guess I've come to think about it in the following way, that we're in the 21st century. The nation state was really a product of the second half of the 19th century; it was really an amazing innovation, to create bureaucracies, to move power to the center, to invent nationalism, which drew people together around the American flag, the American identity, whatever. But I think we're in a different time period, we're in the 21st century, we're in a much more fragmented, networked world, with our various virtual digital realities that we live in today.

We shouldn't necessarily expect to see the same kinds of political forms and formats as we did in the 19th century. So I think the EU is going to have to move forward, as you mentioned, around things like mutualizing debt, around things like having a more robust sense of political identity at the European level. But I wonder whether it can invent a new way of asking people to not just be European, but to be European and Spanish and Catalan, say.

And to design a governance form that's more comfortable with this kind of more fragmented, more networked, less unified way of constructing political authority. And in my new book 'The Politics of Everyday Europe,' that's really what I try to grapple with, is thinking about the EU as a new, innovative political forum, in this long history of political forums, what can we learn from the past, what's really new, what's really different? And I think that's gonna be a fascinating thing to watch over the next couple of decades, really.

Lalwani: Definitely. I guess lastly, then, are you hopeful that these sorts of things will actually come to pass in the next couple of decades, that the reforms will actually take place?

McNamara: So I actually am, because I think that the EU has already accomplished much more than really we ever could have imagined when the original founders, right after World War II, sort of tried to figure out, "How in the world can we get away from these decades of conflicts on the continent? How can we imagine peace and prosperity across Europe?" And I think the fact that we have Germany and France and Britain and Eastern Europe and Southern Europe trying to figure these things out through negotiations not through 'boots on the ground' and so on, I think that that's... We tend to sort of view that as inevitable and natural, and I think we should remember that in the history politics, that's actually an incredible accomplishment, so I'm hoping that they'll continue to sort of be surprising in terms of the history of international relations and move forward in a positive way.