Greece may be doing all the right things to revive our economy. But not everyone may want us to succeed. To succeed, the international community needs to address the threat of speculation and ill-regulated financial markets – a threat that imperils not only Greece, but the entire global economy.
I see that threat every day as we manage this crisis, for the immediate problem we face is not dealing with the recession, but in servicing our debt. Despite the deep reforms we are making, traders and speculators have forced interest rates on Greek bonds to record highs.
Many believe there have been malicious rumors, endlessly repeated and tactically amplified, that have been used to manipulate normal market terms for our bonds. Partly as a result, Greece currently has to borrow at rates almost twice as high as other European Union countries. So when we borrow 5 billion euros for five years, we must pay about 725 million euros more in interest than Germany does. We will have a very hard time implementing our reform program if the gains from our austerity measures are swallowed up by prohibitive interest rates.
This whole affair has a horrible sense of déjà vu. The same financial institutions that were bailed out with taxpayers’ money are now making a fortune from Greece’s misfortune – while those same taxpayers are paying the price in deep cuts to their salaries and social services. Unprincipled speculators are making billions every day by betting on a Greek default. All this may sound a bit familiar, especially to Americans who recently massively bailed out their troubled banks.
Yet unlike the bankers, Greece isn’t asking for a bailout – let alone a bonus. Indeed, we have slashed the salaries of every single government official. I myself have taken a significant pay cut. And we have slashed bonuses in Greek banks by up to 90 percent.
The global economy is interdependent. We all suffer or advance depending on how well we deal with these risks. There are both immediate and long-term steps we can all take to counteract the forces that are profiting off self-fulfilling bets on failure.
In our modern global economy, and particularly in crises, expectations play a powerful role. Many real numbers are shaped by what happens in people’s minds – or “Animal Spirits,” as economist John Maynard Keynes called it. This is why friends of Greece and friends of democracy can and should help out in this crisis.
To me this is a challenge to our democratic institutions. An elected government, making huge changes with the consent of its people, is being undermined by concentrated powers in an unregulated market – powers that go beyond those of any individual government.
It is true that Greece accounts for just 2 percent of the EU’s gross domestic product. But our economic conditions can have a far larger impact than that figure implies. An ongoing euro crisis could cause a domino effect, driving up borrowing costs for other countries with large deficits and causing volatility in bond and currency rates across the world. A small problem could be the tipping point in an already volatile system.
We should remember that the Great Depression in the United States was followed by a second recession in 1937-38 that derailed the world’s recovery and prolonged that crisis. If the European crisis metastasizes, it could create a new global financial crisis with implications as grave as the US-originated crisis two years ago.
For America, a weak euro means a rising dollar. That, in turn, means a rising US trade deficit – which will not help America’s economy rebound. If the EU – still America’s biggest trading partner – should falter, the consequences in Europe would be palpable.
That is why Europe and America must say “enough is enough” to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system – not to mention the human consequences of lost jobs, foreclosed homes, and decimated pensions.
These market manipulations – which were at the heart of the banking system’s collapse – are still legal practice. It is hard to fathom that we have allowed this to happen.
It is common sense, enforced by insurance regulators, that a person is not allowed to buy fire insurance on his neighbor’s house – and then burn it down to collect on that insurance. Yet that is exactly what is done in the market for credit default swaps. It is the scourge that has led banks to foreclose on the homes of millions of Americans. It is the scourge that haunts Greece and all of us.
But if Europe and America jointly step in to shore up global financial regulation – and to finally ensure enforcement of regulations – we can curtail such activities.
It is an encouraging sign that the American authorities have ordered some speculators not to destroy records of their trading in euros. The US authorities should continue to pursue these investigations.
Since the 1980s, we have witnessed a succession of global financial crises – the third-world debt collapse, the US savings-and-loan debacle, the Asian financial crisis, the high-tech and housing bubbles, and now the worst global recession since the 1930s. Globalization – which promised so much, and opened so many doors to those of us with the good fortune of advanced educations and careers – has also brought new inequalities and new risks.
This crisis, therefore, is an opportunity to correct many of the excesses of globalization. It calls for deep structural changes to our global institutions and our system of global governance.
We cannot afford to squander another opportunity to make the critical changes that our current reality demands. Decisive and collective action and regulation is urgently required if global economic growth is to be sustainable. We need global coordination of monetary policies. If we let market forces alone dictate the terms, our economic recovery will almost certainly slip into reverse.
Together with my European partners, we have taken a common initiative to strengthen financial regulation, particularly vis-à-vis speculation. We need clear rules on so-called shorts, naked shorts, and credit default swaps. I hope that there will be a positive response from the American side of the Atlantic to bring this initiative to the Group of 20.
It is time to make the markets work for us, not the other way around.