Watching the debacle of Greek negotiations, it appears I am going to have to modify my theory that democracy is bad at handling economic crises, but oligarchy is worse. I believe this remains true on the national level. But looking at Greek negotiations today, I am starting to think that democracy may be worse than oligarchy at the international level. So how to I square that with my statement that global creditors are demanding that countries be run for the good of international banks instead of their domestic population? Well, for one thing, by now Greece's creditors appear to be foreign governments instead of foreign banks. But that is not so extraordinary. More to the point, that most enlightened group are not actually financial oligarchs the the philosopher kings (economist kings?) of central banking.
The most enlightened actor here appears to be the IMF. That comes as a shock to people of my generation who are used to seeing the IMF as the people who believe that eating is an unaffordable luxury when banks losing money is at stake. But the IMF seems to have learned something from experience and is now probably the actor most willing to allow some relief from austerity. Next comes the European Central Bank (ECB), which seems to be tardily reaching the same conclusion that the Fed did some time ago -- that political actors are paralyzed, so monetary expansion is necessary to save the economy, that an all-consuming obsession with fighting inflation is misplaced in an economy on the brink if deflation, and that expansion, not contraction, is what is needed to save the economy. These things are harder for the ECB to do than the Fed, because the Fed has a mandate to balance inflation and unemployment, whereas democratically elected governments have given the ECB a mandate to focus on price stability only.* The ECB ended sovereign debt crises in Europe by promising to backstop every country's debt. And the German government has been fighting it every step of the way. I have a less clear picture of the European Commission (EC). On the one hand, they are technocrats who regard democracy as a nuisance to be avoided as much as possible. On the other hand, if anyone is prepared to work for a real fiscal union that will avoid such crises in the future, they appear to be the ones.
The least enlightened actors are the democratically elected governments, who are united in their determination never to cut Greece the slightest break, or the rest of the debtors will be wanting one too. Germany gets the biggest rap for this, but in fact all national governments are presenting a united front against Greece. It is easy to see why this would be so for the creditors. They don't want their tax payers on the hook for some other country's irresponsibility. But the debtor countries are equally adamant. Some of this is simply the outlook of we suffered, so should you. Paul Krugman offers the following graph to show why this outlook is unwarranted:
Greece has cut government spending by over 20%; far more than any other country. But there is another reason at work as well. Other debtor countries, under considerably less fiscal pressure than Greece, put their economies through grinding austerity and suffered severe economic downturns. At last all of them are beginning to experience a bottoming-out and even the feeble beginnings of a recovery. If Greece were to get a break, it would lead to "political contagion," i.e., the rest would want a break too. The first article warns that governments committed to austerity must not allow Greece to benefit from any relaxation or they, too, will lose to anti-austerity candidates. And it quotes a pro-austerity politician as saying, “We all know what to do, but we don’t know how to get re-elected once we have done it.” In other words, we all know that austerity is necessary for economic recovery, but somehow the recovery just isn't showing up. In such a case, maybe you should reconsider your assumptions. As for the other, it warns of the terrible, avoidable tragedy that could take place if countries give up on austerity just as it is starting to pay off. Somehow, I can imaging some commentator making a similar comment in 1932 or '33 in the transition between Hoover and Roosevelt. (More on that later).
So maybe my initial statement that democracy is worse than oligarchy at the international level needs further refinement. The creditor countries are behaving like democracy in predictably bad ways -- nationalist, indifferent or hostile to the interests of other countries, and prone to kicking down. Such things are familiar enough. It is exactly how the US in general and bankers in particular reacted to the Latin American debt crisis of the 1980's. And the Asian crisis of the 1990's. And the renewed Latin American crisis of the turn of the millennium. For that matter, the balance of payments crises that followed WWI and contributed so much to the global depression were much the same story. The US would not give Britain a break on its debt, so Britain would not give France a break, so France would not give Germany a break, and Americans asked why France was being so unreasonable.
But pro-austerity governments in debtor countries are behaving more like a typical oligarchy -- confusing its privileges (in this case, its electoral prospects), panicking at the slightest challenge to its privileges, and refusing to learn from past mistakes. Right now, rather than admit that they made a mistake and inflicted years of needless suffering on their populations, they are willing to crush the Greek economy and continue to squeeze their own.
Or, to put it differently, the EU appears to have combined all the weaknesses of both democracy and oligarchy with none of their strengths!
*But fear not. There are plenty of people in the US who are enraged at the Fed for trying to save the economy and want it to stop at once and be prevented from ever doing it again. Of course, this may at least partly be politically motivated.