Greece: Sovereignty and Democracy

European leaders reacted in horror, markets were panicked and a crisis brewed in Greece.   Why?  The Prime Minister had the audacity to put the agreed upon EU bailout plan up for a referendum vote.   The Greeks might actually get to vote on the issue, and they might not follow the dictates of big banks, big money and big government.

One “dirty little secret” of globalization is that it erodes state sovereignty and increasingly puts decision making power in the hands of a wealthy elite connected to global finance and the largest corporations in the world.   This has been a relatively recent phenomenon.   Before the 80s when regulations limiting the ability of capital to travel across borders with ease, only a few powerful actors were truly global in their investment and corporate structure.   Moreover, even if they could travel the limits on communication, information and control of distant parts made such ventures both risky and pricey.   Domestic economic activity was its own world.

In those days France and Italy could have expansive and inflation-friendly monetary policies while Germany and the Netherlands could limit inflation with tight monetary policies.   French and Italian capital had little capacity to leave their inflationary home for a more stable German investment.

That also meant that states were in control of their domestic regulatory and taxation regimes.   If a state wanted to enforce tough environmental standards, it could.   If it wanted to require companies offer benefits, or insure greater labor protections, it could do that too.   States didn’t have to, but at least in the advanced industrialized world it was up to the democratic organizations that comprised government.   The people through democracy made those calls.

As capital globalized and the technology revolution made control over distant and remote sites easier and ever cheaper, everything changed.   An embrace of laissez faire economics meant a dramatic reduction in regulations, allowing capital to go wherever a profit was to be made.   That meant pressure on states to downsize their regulatory structure, limit taxes on corporations, and do whatever they could to create a “business and investment friendly” environment.

By the 90s France and Italy had to give up their inflationary policies as capital was fleeing to find more stable currencies.   To get investment, they needed to mimic Germany and the Netherlands.   Absent the capacity for separate monetary policies, the common currency became possible.    This is what Thomas Friedman called ‘the golden straight jacket’ – states have to do things that bring investment and growth, otherwise they sink.

Friedman saw this as good, but it has two side effects.   First, it moves us away from the Westphalian system of sovereign independent states and towards something new — but we have no clue yet as to what it will be.  The idea that sovereignty is being eroded seems less obvious if you’re a big powerful state — but the current crisis is bringing home even to the US and China the limits of what a state can do.   If states are losing sovereignty and new international actors are gaining control — big finance, large corporations and to a lesser extent international organizations (e.g., the WTO) and non-governmental organizations — how will states respond?   How will the diverse power conditions be reflected in a world that is no longer the realist ideal of independent sovereign billiard balls interacting?

Secondly, for democracies this also means a real loss of democratic control.   Publics can demand tougher environmental standards, but governments will see that this will drive away investment and be forced to say no.   People can believe in hope and change, but if power is not really in the hands of the government, all politicians can do is make promises and hope they can persuade “big money” to look kindly upon their interests.   This has been evident for decades in small states (see Peter Katzenstein’s “Small States in World Markets” from the early 80s), but with globalization it increasingly limits large states.

That is a crisis for democratic political theory and democracy in general.   If power no longer resides with the people and if it is exercised by global actors pursuing agendas that are not focused on the general good of particular states, how long will people tolerate that without getting angry?   But even if people get angry, what alternative exists?  How can people impact global actors outside of state reach, lacking transparency and pulling the strings of governments both on the left and on the right?

Enter Greece.   Big money sees a threat.   Big European banks could be threatened by a Greek default.   CDS exposure (credit default swaps) in US banks could create contagion that might bring down the global financial system.   A Greek default makes Italian, Spanish and Portugese defaults thinkable.   Bond yields will rise there, and the crisis will expand (with increased exposure of both European and US banks).   Even China would be hurt badly by such events as it would decrease global demand for their goods.

So “big money” gathers to fix the problem.   Banks take a 50% haircut on bond exposure.   Governments vow to recapitalize the banks and fix Greek debt.   The Greeks are ordered to engage in massive austerity programs likely to enhance the recession that has already dramatically lowered their standard of living.    The Greeks don’t like it, but their government like all governments has to respond to the demands of big money.   The people are irrelevant.

And then, to the shock and dismay of elites everywhere Greek Prime Minister George Papandreou says that the Greek people have a right to vote on this.

Blasphemy!   Sovereignty is being asserted!  The Democratic right of the citizens to say no to global corporate finance and the nexus of big government and big money is proclaimed!   Chaos, panic, how could he do such a thing!   From Wall Street to Geneva to Frankfurt to Athens pressure is exerted, threats are made….how dare the Greeks assert sovereignty and democracy, don’t they know what’s at stake?

Yes, they do.

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  1. #1 by Black Flag® on November 2, 2011 - 19:36

    Give the ignorant the vote, and you legitimize ignorance.

    Mob rule at its best, which is of course, at its worst.

    Public Choice Doctrine – they will vote themselves more of other people’s money. No surprise.

    Greece is done for… the cities are about to burn.
    The goes the rest of Europe….

    • #2 by pino on November 3, 2011 - 03:38

      Greece is done for… the cities are about to burn.

      Can I have their stereo?

    • #3 by Edwin Herdman on November 6, 2011 - 07:09

      A commentator on Marketplace (an NPR show, great fun) said that Papandreau was doing “the humane thing” by giving the people an outlet for their frustrations. For the rest of the world, perhaps not. For Greece, which has seen anarchist violence throughout most (if not all) of the new millennium – I think the case is strong that he has tried to do the humane thing. Of course, the law of unintended consequences is having a field day at every step of this process (and in the foreseeable future as well).

      Papandreau’s move – which I think will be better thought of as time and distance bleed the memory of this painful event – did come for this reason and he achieves at least a partial victory as he was able to carve greater support from the other parties. Papandreau has specifically stated that by forcing a political acceptance that he intends to ‘unmask’ (I believe that was the word) the actors against austerity. Perhaps the actors behind the effort to sink Greek austerity acceptance are not those Papandreau would have identified – they appear to be more the average Greek than shady economic alliances. Many European and American commentators are cynically (using the term generically, not in terms of Greek philosophy this time 😉 categorizing Papandreau’s move as “spreading the pain” but it is really focused on making the austerity measures unassailable, to prevent Greek collapse and Greek politicians from other parties from dividing the electorate on the issue. He appears as a bad neighbor – predictably, the stock markets took that cue last week – but without pushing the issue in this way he would have allowed people room to maneuver and make false promises to the Greek people.

      In any event, the next election was always going to be a referendum on this policy.

      For me (having been a student of the EU) the very interesting question (and probably for Dr. Gunther Hega, expert on German Federalism and generally on the EU at Western Michigan University) beyond whether the Euro Zone survives is whether the attempts to create a more democratic set of institutions and reduce bureaucracy, while also increase the flexibility and efficiency of the EU, have been in the right direction. The simple dichotomy I mention in the EU design – true freedom and accountability versus stability – has been the lurking devil in the details for a long while in the EU system.

      With the great experiment of the EU, these 27 nations are trying to give political interests a fair shake…in a procedural body. The American Founding Fathers would have had something to say about that; alas, even today people forget that when the legislature is working slowly it is working as intended. (Of course, Congress works just fine with its own arcane rules in place, so I think that to some degree Euroskepticism is not well founded on such a line.)

      Humorously (in retrospect), I remember a year or two back when I was taking my courses on the EU that one would hear about the “EU crisis” after the summit failure in 2005…of course, the (some would say artificial) crises relating to the EU budget (France versus Britain) and the failed referendum votes in France and the Netherlands were really nothing compared to the against-the-wall panic caused by economic woes – 2007, 2009, and again 2011. For a while it was as if the economic crisis would be contained but Europe would still have to face popular challenges. The agonizingly, and seemingly illogical, referendum failures against the EU Constitution can now be seen through the prism of this latest economic meltdown as defenses of the European nations against economic slavery to the worst-run economies in the system. Ironically, of course, Turkey was the perennial loser of EU membership drives and yet they are doing incredibly well and would have been a key member of the Euro Zone in this latest crisis. Even before this latest crisis, Turkey had decided to forego the humiliating procedure. In the meantime, countries which lost a strong currency in joining the Euro Zone are coming to regret it more than ever (like Germany), while even Switzerland finds itself scrambling to ruin the plans of currency manipulators and well-intentioned investors alike, desperate to get value out of the fortress economy.

      Prospective EU member countries have to meet certain economic indicators – low debt level being one that Greece masked until the government of Papandreau – but there is additionally no method of booting out countries that slide backwards after meeting this goal. Of course, there was an opportunity for a moral hazard – if we fudge the numbers, the affluent countries will bail us out! – though I don’t know of any evidence that this was anything but the result of successive governments in Greece shoveling all the skeletons into the closet and hoping they would never spill out.

      Instead of saying that the sky is falling, I would like to point out that the simple apparent reason for this failure is possibly an insufficiently rigorous process of economic scrutiny for EU members, which, when coupled with the great EU expansion in 2004, provokes the specter of further failures and more shared pain from future too-cheery economic forecasts. However, it is not apparent to me that Greece lied at the time of its membership – Greece joined in 1981 and the main dispute was of ownership of a small island with Turkey, not budgets – and even if it had, it is the lesson that “shared pain” is a hard sell across many different economies, even if there is no malfeasance involved.

      Yet coupling current membership with economic status would be impossible for a variety of reasons – both logistical (Euro one year, drachma the next, Euro after that – to say nothing of all the translators that would be out of work in Brussels!) and in terms of subverting the integrationist aim of the EU policy, which was seen as so essential to the foundation of the first forerunner of the EU, the European Coal and Steel Community between France and Germany after WWII.

  2. #4 by titfortat on November 2, 2011 - 19:51

    Im curious, what are they actually voting for? It reminds me of the old quote, “youre dead, you just dont know it yet”

  3. #5 by Sean Patrick Hazlett on November 3, 2011 - 02:35

    It terrifies me that the cradle of Western civilization could now be its coffin. The Greeks have lived it up for years, retiring at 55 and engaging in rampant corruption. In my view, this is irresponsible behavior on the Greek PM’s part. Let’s just hope the Greeks understand what is truly at stake here.

    • #6 by Edwin Herdman on November 6, 2011 - 07:14

      Until the current Prime Minister, nobody was acknowledging this problem. The government that immediately preceded Papandreau’s was Conservative.

      I think we can all agree that this move by the Greek PM was either at best mistaken, or that the Greek PM was counting on the turmoil the move would cause being only temporary and that the logic of his decision would be seen. However, it does the man – who is always described as having nerves of steel and a very calm manner, and a calming presence in debates – no justice to ignore that it was his government that brought this deception to the end.

      If only he was an obscure official in some junior Greek accounting office, he would be celebrated throughout Germany and elsewhere as the whistleblowing crusader. Instead, he had the misfortune of being not only the bearer of bad news, but was expected to come with a solution in the other hand.

  4. #7 by pino on November 3, 2011 - 03:37

    And then, to the shock and dismay of elites everywhere Greek Prime Minister George Papandreou says that the Greek people have a right to vote on this.

    I wonder. Are we truly willing to let Greece fail and fade away? If the people vote, and it looks as if the Prime Minister is cowardly enough to allow this to happen, and they reject this deal, are we willing to let Greece fade away?

    • #8 by Scott Erb on November 3, 2011 - 04:06

      Well, the easy route for Papandreou would be to not have a referendum. It may be unwise, but it’s not cowardly! But on an issue of this importance, shouldn’t the people be allowed to vote? Do we believe in the will of the people being reflected by the government? If the referendum happens, there will be spirited public debate. The Greeks may approve in which case the measure has validity and it will undercut protests and unrest against it. If they vote no Greek will default.

      Greece has defaulted many times in the past. Greece wouldn’t fail and fade away, it would simply continue to be a second rate economy. But the banking system of Europe and the US would be under threat and the world might face a financial catastrophe. Owe the bank $10,000 and can’t pay? You’ve got a problem. Owe the bank $1 billion and can’t pay, the bank has a problem!

      But what fascinates me is the issue in the heading: sovereignty and democracy. Is Greece truly sovereign — can it choose to simply leave the Euro and default? Is Greece truly a democracy, do the opinions of the citizens matter on issues like this? If we think sovereignty and democracy should be sacrificed on behalf of the global economy, well OK. But what does that say about the state of world politics in the early 21st century? This issue is a microcosm of the core issue behind OWS: what voice do the people have?

  5. #9 by renaissanceguy on November 3, 2011 - 09:44

    You used the expression laissez faire. Let me give you a quick French lesson. It means “leave alone” or “let alone.” It is not being practiced anywhere in the world today. If it were, there would be no question of anyone bailing out Greece or California or the big banks. Leaving them alone means–guess what–leaving them alone.

    • #10 by Scott Erb on November 3, 2011 - 11:46

      Yes, I know what it means. And de-regulation based on that has been a driving factor in the last 30 years as government limits on capital and investment has dramatically decreased. That’s one reason we’ve had this crisis and the problem with OTC derivatives. In Congress Alan Greenspan even admitted that to his surprise and discomfort his world view that “markets get it right” had been proven wrong by this crisis. Laissez-faire economics simply has been discredited.

  6. #11 by Alan Scott on November 3, 2011 - 12:03

    The EU IS not bailing out Greece. They keep saying that. The EU wants to bail out it’s banks, which stupidly lent money to Greece, not to finance economic growth, infrastructure, or even a war . Those all end . The EU banks financed social welfare. That has no end, except in disaster.

    The European banks are sitting on trillions of Euros worth of worthless paper. Greek debt has no value. The EU should just bail out their banks and let Greece sink.

  7. #12 by Alan Scott on November 3, 2011 - 12:05

    Correction, not Trillions, Billions.

    • #13 by Scott Erb on November 3, 2011 - 13:10

      I think what the EU is worried about is that once the ‘seal is broken’ and it becomes clear that Eurozone states can default, then the bond yields for Italian, Spanish, Portugese and other debt will sky rocket and the crisis will repeat (and bank exposure on that debt is even more than Greek debt).

      You are right that its about the banks. A default will force Greece to live within its means, and a return to the drachma will create inflation. But it won’t be the end of Greece. Recapitalizing the banks is probably the best option (though I’m not sure what it means for us — CDS exposure in US banks may be large).

  8. #14 by Alan Scott on November 3, 2011 - 22:03

    Scott,

    I think we could agree on one thing. There is no transparency at all with bank exposures. Nobody knew that our banks were so exposed to the CDSs and the other derivatives from the mortgage debacle. Greenspan sure had no clue. Nobody knows the extent of liabilities of European banks and our banks to Greece, Italy ,and Spain.

    The people we trusted and still trust are not smart enough to protect us. Or maybe we are not smart enough, by who we keep putting in power, and I mean both parties.

  9. #15 by Scott Erb on November 5, 2011 - 20:40

    Alan, yes we can agree on that.

    Also, it appears that there will be no Greek referendum after all — much to the anger of the Greek people. That’s not necessarily bad, but to me it indicates that democracy and sovereignty are both weaker than ever, and the state is losing power to global business and financial corporations. These big actors are hard to hold accountable or make transparent. That’s politically unstable; we’re entering the “post-Westphalian system” and need to figure out a way to hold the use of power accountable.

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