Early last week, the world’s markets were on a roll, celebrating a landmark deal forged among the members of the European Union.
The deal required the European banks to write off half the value of Greek bonds, relieving that country of about 100 billion euros of debt. In addition, member countries committed contributions that will raise the European financial stabilization fund to a trillion euros. The financial adequacy of European banks was raised. New measures to harmonize fiscal policies among the member-economies were fashioned.
The deal was forged with all the European heads of government meeting into the early morning hours. Immediately after the deal was announced, markets across the globe kicked up. The euro gained exchange value against all the major trading currencies. There was unfamiliar euphoria in the air, a sense that the grinding financial problems of European economies were beginning to be resolved.
Partaking of the global euphoria, I wrote in this space last week about this landmark deal. There I praised the heroic leadership provided Europe by the tough duo of Angela Merkel and Nicolas Sarkozy.
The euphoria, however, was severely abbreviated. Just as suddenly, the optimism evaporated. The markets slumped. The sense of profound crisis returned with a vengeance.
The sunlight did not last. It was a brief flash that barely interrupted the financial nightmare that will affect us all.
The first signal that this deal was too good to last came from across the Atlantic. A large US financial institution, holding large amounts of European bonds, declared bankruptcy as a direct consequence of the pricing down of Greek debt paper.
Then came the main blow, the deal breaker so to speak.
Greek president Papandreou announced he would submit the terms of the deal to a referendum. That announcement had the effect of taking out the floor from underneath a deal that took many months to fashion and a lot of political pressure to win consensus among the EU’s 27 member-states.
The deal, even as it relieves Greece of a lot of its outstanding debt, still requires severe austerity measures on the part of the Greek people. Understandably, the austerity measures are unpopular as it involves wage cuts, withdrawal of subsidies and more expensive public services such as toll fees. In addition, Athens needs to impose new taxes to improve the revenue profile of the Greek government.
The financial crisis Greece finds itself in and the austerity measures required to climb out of it threw the entire society into political turmoil. There have been almost continuous demonstrations and strikes in Greece over the past few months. The government is besieged. The Greek president is at the ebb of his popularity.
In a referendum, the terms of this Europe-wide deal will most likely be rejected by the Greek people. When that happens, the only option is to junk the deal, allow Greece to default and probably expel the debt-ridden country from the common currency union.
Papandreou’s decision to submit the complex deal to a referendum blindsided all the other European governments. There were no clues given indicating that the beleaguered government in Athens would resort to this.
To be sure, attempting to win public support for a painful rehabilitation process is consistent with the ethic of democratic politics. The austerity program spells political suicide for Papandreou’s government and very likely an escalation of the turmoil embroiling Greek society.
Greek politics ran on populism for generations. Acceptance of the austerity program requires a level of public far-sightedness that is unknown to the Greeks. It also requires a quality of statesmanship alien to the pork-barrel state that governs Greece.
Surprised, but never at a loss for words, Sarkozy reminded his partners in Athens that, on this issue, there is a clash between domestic democratic politics and solidarity with the European Union. There is a veiled threat there: if the Greek state cannot hold the line and do what must be done to save itself and the entire financial order, it must withdraw from the union and, in effect, become a pariah state.
There is anger and frustration everywhere else. Greece is now being described as an irresponsible country that is now holding hostage the global financial system no less.
This country, after all, pandered to its people by financing subsidies with debt. The debt ballooned out of control and required a massive international effort to bail out the Greeks. Now, because the austerity program required to gradually cure the problem proves too painful, the Greek government hides behind the veil of democratic practice to basically evade the therapy.
This is a pattern of irresponsible behavior that is not peculiar to the Greeks. It is just that, given the dimensions and context of their unserviceable indebtedness, they are holding the rest of the world hostage to their whim.
This is a pattern of behavior chronic to populist politics, the inclination to misuse democracy to evade responsibility.
We saw this in our own experience. When the dictatorship was overthrown, part of its unhealthy legacy was a huge foreign debt that required a painful process of structural adjustment to sort out.
Populist movements clamored for the repudiation of the debt, saying it was incurred by an unaccountable government that subsequently misused it (even if much of the debt was actually incurred to subsidize power, transport and water).
Fortunately, our government held its ground, unpopular as the measures required might have been. That set us on a path of sustainability and averted the possibility we make of ourselves a scourge on the rest of the global economy.