It's official: paying only $628,000 of the $58 million due yesterday, the government of Puerto Rico has defaulted. Yet the financial markets are quiet, there is no talk of PuertoExit, there are no queues at the counters of Puerto Rican banks, and there are no protests in the island's streets reminding the Americans of their guilt in having violently suppressed the independence movement in the ‘30s. Why is that?

Greece and Puerto Rico have much in common. Both are a small part of a larger monetary union (the euro and the dollar) and therefore have no control over and cannot devalue their currency in a crisis. Both are not part of a real political union (Puerto Rico is not a state, but an American territory, lacking real political representation). Both have a history of political corruption, much higher than that of the rest of the union (in the Corruption perceptions index, where the best countries have a score of 2.5 and the worst a score of -2.5, Puerto Rico has a score of 0.5 against the United States' 1.3, and Greece has a -0.1 against the European Union's 1.1). Both have a climate not very favorable to business. In the ranking of Ease of Doing Business, Puerto Rico comes in 47th and Greece 61st. Not surprisingly, both countries have serious financial difficulties.

Aside from size (Puerto Rico's debt is 70 billion compared to 300 billion in Greece), the reason why the crisis in Puerto Rico is not as serious as that of Greece is due to the different institutional setup of the two monetary unions. First of all, the treatment of government debt for regulatory purposes differs. Thanks to the Basel II rules and how these rules have been interpreted by the European banking system, Greek sovereign bonds were considered safe and as such exempt from any capital requirement for all European banks. Before 2010 this pushed European banks to fill up on Greek government bonds, with the effect of amplifying the crisis at the European level and creating a perverse relationship between the solvency of the state and the solvency of the banks. None of this happened with Puerto Rico's debt. Thanks to this, the US Federal Reserve does not control the survival of the banks (and government) of Puerto Rico as the European Central Bank has done with Greece. And again thanks to this, the prospect of restructuring Puerto Rico's debt will not cause systemic effects on the US banking system.

The second difference is that the banking union with Puerto Rico (unlike that with Greece) is comprehensive. Puerto Rican banks' deposit insurance (up to $250 thousand) is guaranteed by federal funds and therefore not at risk during the crisis. It's no coincidence that the federal fund saved three banks in 2010 and one in 2015, at a cost equal to 7% of Puerto Rico's gross domestic product. The European fund, just created in 2012, would not have the resources today to do the same in Greece.
Finally, Puerto Rico receives federal transfers. Before the crisis, these transfers amounted to about 13% of Puerto Rico's GDP, and then rose to 21% during the crisis. Greece, rather, receives net transfers from Europe of about 3% of its GDP, and these transfers have not increased during the crisis.

Despite these differences, Puerto Rico has defaulted. Therefore introducing these rules in Europe would not eliminate the risk of default, but only reduce the negative consequences. Since the crisis began, Puerto Rico's GDP has dropped “only” 9% compared to Greece's 25% drop. Today unemployment in Puerto Rico is “only” 14% compared to 27% in Greece. Not surprisingly then, even the social and political consequences are much less dramatic in the Caribbean country than in Greece.

It's wrong then to see greater European integration as the cure for all ills. As demonstrated by Puerto Rico, if a country is not competitive and does not properly handle its public finances, sooner or later it will pay the cost, with or without greater integration. Europe, however, not only has no mechanism to reduce the negative consequences of this kind of crises, but seems designed to amplify the cost for the country in a crisis. This should be taken into account by German finance minister Schauble, who had jokingly compared Puerto Rico and Greece. If you want to save the idea of Europe, then federal safety nets are needed. Unless you want to send in the army, as the Americans did in the ‘30s.

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