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.