Sunday, June 12, 2011

The Government vs. The People: Greece and the EU

There must be a great deal of irony for Greece's social democrat government (the PASOK party) and the voters who brought them into office, that it is they who will preside over the deepest budget cuts in Greek history, that it is they who will look out over what Pantelis Boukalas of the Greek newspaper Ekathimerini has called the Sea of People protesting in Athens, despite being on the left of the political spectrum. Those cuts were agreed with foreign powers on Thursday and will be brought to the Greek legislature this coming week. We are sure to hear voices that say TINA: There Is No Alternative. Indeed, Barack Obama has joined the TINA chorus, arguing that there will be devastation throughout the global financial system if Greece defaults.

There is no doubt that a Greek default would be costly, but it is an alternative, and regardless of what the parliament chooses, a real democratic debate of the options will be both legitimate and useful for all. Those who have been watching Iceland lately have seen that the country is back in grace already. Mind you, the debts involved were private ones taken on by Icelandic banks, but the country was told many times that it was obligated to take on those debts and service them for decades, lest the international financial community ostracize the country. The investors indeed turned their backs for a while, but they are back.

The real examples to look at, however, are Mexico and Argentina. Mexico is a good example of a country that went through a partial, but relatively orderly default with the assistance of the United States. Loans to Mexico made through the Brady Bond system helped to bring the country back on track after a collapsing bubble in Mexican public debt, that is reminiscent of the Greek situation (with the exception that Mexico's economic situation was in some ways better). Argentina, on the other hand, is a good example of what happens when such compromises are not made, and when such assistance is neither sought nor granted. Riots, fires, food shortages, collapse and chaos.

Those compromises will not come unless the Greeks make it clear there are some things they must insist on. Is there anything they really must have in order to respect themselves as a democracy? And what price are they willing to pay for that?

And given the response, should they remain in the euro? 20 years ago, dollarization was all the rage in Latin America and East Asia. Everyone was doing it, until they realized it was actually bad for them. We have different currencies for a reason. Having a common one has advantages, but disadvantages as well that can outweigh the benefits, as they do in Greece.

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