Lesson from history 3: Modern Greece

G20 meets amid Greek crisis

In the second follow-up to the article on the problems of a Spartan Constitution, I want to look at what lessons can be learnt from modern Greece.

From a Free Market perspective, we first need to examine what should have happened in 2008 - no bank should have been bailed out. In business you take your chances and part of that is that you have to accept the consequences of your actions, one of those consequences may be that you go bankrupt.

Yes people would have lost their savings and people's pension funds would be worth less and some would have had their homes re-possessed, but the damage would have now been done and the process of recovery would be well underway... instead  people have lost their savings and people's pension funds are worth less and some have had their homes re-possessed and three years down the line those same banks may still go bankrupt, but now they may take out nations along with them.

Bankruptcy is part of the economic process, it is the mechanism by which money is destroyed. When someone goes bankrupt some or all of the debt they hold is written off, this would have been healthy for the economy, like a grassland fire, burning away the old and making way for the new.

New banks, free of debt, could have been established with bailout funds which could have purchased the salvageable parts of the old. The failure to allow banks, who had made bad decisions, to go under is having catastrophic consequences, nowhere is this more evident that in Greece.

Greek Prime Minister George Papandreou finally remembered that his country is the birthplace of democracy and decided to effectively repudiate a European “rescue” plan for Greece by putting it to a referendum vote.

The Greek people are resisting the idea of a generation of fiscal austerity in order to save German and French banks. It has been mystifying up until now why Papandreou’s left-of-center government has been willing to let Germany, which has been the main beneficiary of the decade-long euro experiment, impose such draconian hardships on the Greek public.

Papandreou, the third generation in his family to run a left-of-center government in Greece, finally almost listened to the protesters in the street and stood up to the banks and their political proxies. It may or may not keep him in power, but it is clearly the best thing for Greece at this point.

By calling for a referendum, Papandreou finally listened to the people.

Greece has a huge foreign debt mostly because Germany has a huge current account surplus (thanks to locking Europe into a common currency), and that’s why Germany really does owe it to Greece to “bail” them out (the bailout of course is for the German and French banks).

Yes, Greece may have gotten carried away with benefits for public-sector employees, and that is part of the problem, but the true market-driven solution to that piece of it is default and devaluation, which is where we are finally headed. There is open talk of Greece leaving the euro zone and returning to the drachma.

Europe, as commentators have noted, can probably get along fine without Greece in the euro zone, but Europe’s problems probably won’t end there. It’s almost certainly too late to simply lance the Greek boil and expect things to go back to normal. Markets will start pushing next for a return to the lira by Italy and to the peseta by Spain.

At the G20 meeting in Cannes, France, Greece's decision to hold a national referendum on the recent bailout deal became the focus of discussion.

The lesson is that this whole mess is the result of a combination of arrogance and ignorance — not in the people of Greece, Italy or Spain — but in the political elite in Europe for first foisting a Europeanized version of the deutsche mark onto these countries and then failing to own up to the consequences.

In the end, in a democracy, these politicians have to answer to the people. And by the time you have street protests exploding in violence, you have to know the people are pretty angry.

The reason that most modern democracies have two political blocs — Authoritarian and Libertarian — is not because one is right and the other is wrong, but so that the countervailing interests of the voters can be balanced through a healthy alternation in government.

But if a left-of-center government, like that in Greece, buckles under to the banks and forgets its task to represent the interests of everyday working people, then the system risks breaking down. By finally remembering his responsibilities, Papandreou hoped to head off that breakdown in his country. It may create a financial mess in Europe, but a referendum or a snap election in Greece is the only way to reconcile this kind of austerity in a democracy.

In Jersey, the reason the Libertarians have thus far failed to offer any meaningful resistance to the dictates of the Authoritarians lies in the lack of any real bite to the recession as yet. This is now beginning to be felt and with more tax rises to hit on January 1st 2012 combined with what looks to be an ever worsening economic situation, higher unemployment and a pointless 'stimulus' program which will do little but drain further the capital reserves of the island, there seems little prospect for anything but ever growing unrest.

Given the size of Jersey, and the extremely strong entrenched position of the establishment which looks to be headed by ultra-conservative Sir Phillip Bailhache whose sole aim appears to be to resist the tide of change and silence people who would disagree with him and the complete lack of sovereignty over a currency which has higher deficits and higher debt than any other European nation, Sir Phillip has as much chance of success as King Canute when he commanded the tide to stop rising.

In the Jersey version of democracy, with a lack of diffusion of power, someone is going to have to answer to the voters.

Two cheers for Papandreou for finally giving democracy a chance to live again in Greece. Sadly we know that Jersey politicians are not paying attention.