Posted by: Dirk | June 30, 2011

The importance of being Hellenic

In my last post, I have expressed my dissatisfaction with the portrayal of the Greek situation in the news media. Now I read this in the NY Times:

The European Union was supposed to shore up a fragmented Europe, to consolidate its democratic potential and to transform the continent into a force capable of competing on the global stage. It is perhaps fitting that one of Europe’s oldest and most democratic nation-states should be on the new front line, throwing all these achievements into question. For we are all small powers now, and once again Greece is in the forefront of the fight for the future.

Mark Mazower is a professor of history at Columbia University.

I don’t know what Mark Mazower had in mind, but calling Greece “one of Europe’s oldest and most democratic nation-states” makes you wonder. Wikipedia reveals that modern Greece was established in 1830. There are many older countries, like France and the United Kingdom, Denmark, Sweden, Monaco, etc.. Regarding the “most democratic”, this is what Wikipedia says (among other things):

King Constantine‘s dismissal of George Papandreou‘s centrist government in July 1965 prompted a prolonged period of political turbulence which culminated in a coup d’état on 21 April 1967 by the United States-backed Regime of the Colonels. The brutal suppression of the Athens Polytechnic uprising on 17 November 1973 sent shockwaves through the regime, and a counter-coup established Brigadier Dimitrios Ioannidis as dictator. On 20 July 1974, as Turkey invaded the island of Cyprus, the regime collapsed.

Only in 1975 was the monarchy abolished. You might not find these issues important, but think about it one more time. Greece is a small, economically backward European periphery. It plays a minor role in the European Union and in the euro zone, so much so that I don’t bother to find you numbers to calculate the share of its GDP in total GDP of either groups.

If Greece is so small, why is it so important? Two explanations might spring to mind. First, it might be about expectations. A Greek default would mean that other countries – like Ireland, Spain, … – might follow. Second, there might be a technical explanation. If financial firms are highly leveraged, then Greek loans might act as collateral in many deals. All these would fall apart if Greece defaults. If you leverage up, you might have used Greek sovereign bonds, and counter-party risk might arise just like when Lehman Brothers went belly up. Perhaps, both explanations combined are the most realistic explanation of why tiny Greece makes a huge impact on the world’s financial markets.

It is a strange world where the global economy seems to depend on a very small country that has had many problems for some time, but so did other countries. I think this kind of financial system that we have today enlarges shocks and transmits them in a magnified way. This is bad, and it should be changed. Financial regulation should be discussed now, since in the European Union we will have decisions about it in this autumn. Strangely, there is not much to read in the press. Financial regulation should protect the people in the European Union from being victims of someone else’s bad decisions. Responsibility for action has to be enforced through the regulation of financial markets. Otherwise, like in the Greek city states of the Hellenic period, democracy and prosperity might disappear for a while, kind of surprisingly like it began, as a Columbia professor tells us in his excellent book.

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