Tuesday, November 01, 2011

The Greek Referendum

The Greek Prime Minister George Papandreou surprised the world today by announcing that he will put the bailout plan for his country up to a public vote.

I find two conflicting principles at play here.

One the one side, people do not get a vote as to whether or not they will pay back money they have borrowed.

I can imagine somebody to whom I have lent money telling me, "I have taken a vote and I have decided against paying back the money I owe you."

Or, I can imagine my bank saying, "Our Board of Directors have taken a vote and decided against returning any of the money you have in your savings account."

Or my employer saying, “Our board of directors has voted to keep the money we would have otherwise paid you for the last month.”

When the Greek government borrowed this money, they gave others a claim on future Greek income. Perhaps they should not have done this. In fact, they should not have done this.

In doing so, they have given themselves an obligation to pay back that borrowed money according to the terms specified. If they cannot do so - or they cannot pay all of it - then they need to come to some sort of agreement with the people to whom they owe these obligations. They cannot simply say, "We have voted not to pay our debts."

On the other side - speaking in favor of such a referendum - it is good for people to take ownership of their obligations.

There should be no problem with giving the people of Greece a vote in whether or not to pay back their debts, and getting a resounding "Yes" in response.

It would be nice to get the Greek people on record as admitting, to themselves and the world, "Okay, we have these obligations. We have decided to honor and respect them."

The problem here is that - what if the Greek people are not willing to live up to their obligations?

The reason that this proposed referendum is causing so much turmoil is because the people of the world think the Greeks are dishonorable and immoral people who will simply refuse to pay what they owe.

This means that the people to whom Greece owes money will suffer. They, in turn, will be put in a position where they cannot pay off their debts unless they adopt austerity measures themselves - and perhaps not even then.

Imagine getting a telephone call from your boss at the end of the month saying, "We have decided not to pay anybody this week. I know you did the work and we owe you the money, but we have decided to keep it instead."

Putting aside the fact that they have no right to make such a claim, there is also the problem that you have rent or mortgage coming due, car payments to make, a power bill to pay, and other uses for that money. If you had known you would not get paid, you would have likely spent the last month finding some other source of income. However, now that you have done a month’s worth of work and it is time to get paid, you no longer have that option.

A referendum is a good idea when given to honorable people who respect their obligations. It is a less than good idea when offered to dishonorable people more than willing to inflict harms on others if they can obtain a financial benefit in the process.

In this sense, it is like giving the a community a vote on whether to institute slavery. Moral people would simply vote a unanimous "no" and be done with it. However, there is some reason to worry that even the idea of a vote gives the institution of slavery an illusion of legitimacy. It is something that moral people not only would refuse to adopt, but something people generally have no right to adopt.

And what should you do if you live in a community where there is a real sense that the people will end up voting FOR slavery? In this case, is it a good idea to suggest that the people have a right to vote on such an issue?

This is the type of situation that Greece faces with respect to this public referendum. There is a clear answer to what they should do. The question is, are they of a good enough moral character to do it. And, if not, should they be given the option of voting on something they have no right to do?


Joshua Bennett said...

It's interesting that you make the comparison with private individuals deciding not to pay their debts, but you characterize it as greed rather than necessity. In fact, people decide not to pay their debts out of necessity all the time, and we call it bankruptcy.

If Greece decides to default on its debt, it is deciding that it cannot afford to do so (i.e., the costs greatly outstrip the gains), not that it just doesn't feel like paying up.

Alonzo Fyfe said...

Jashua Bennett

The idea that a person (or country) may be so far in debt that it can no longer pay back its creditors was covered in the article.

If they cannot do so - or they cannot pay all of it - then they need to come to some sort of agreement with the people to whom they owe these obligations.

The deal that the government reached 5 days ago - the deal that the referrendum is about, ultimately - meets this obligation. Some of the debt was removed (some holders of Greek debt were to discount the debt by 50 percent), where Greece was to repay the rest.

Ultimately, though, the people who object to the deal are not saying that Greece cannot afford to cover its debts. They are saying that Greece can afford to do so but chooses to reject the austerity measures that would allow it to do so.

Joshua Bennett said...

Whoops! That's what comes of reading too quickly. Thanks for pointing this out.

That said, didn't Greece already go a round of austerity measures that economists said would be enough to balance its budget? Is there any reason to believe that more austerity measures will help (or at least cause the benefits of paying the debts to outweigh the losses)?

Villa said...

Sovereign risk seems to be an essential difference that breaks the analogy.

If you and I sign a contract, the general understanding is that it will be followed according to the laws of the US. Non-payment is breaking the understood rules. And the breach of the rules is the ethical problem.

However, when someone buys national bonds, sovereign risk is a known option. It is already incorporated into the price of the loan.

Doug S. said...

When someone in the U.S. signs a contract to borrow money, bankruptcy is also a known option and is priced into the cost of the loan...

Joshua Bennett said...
This comment has been removed by the author.
mojo.rhythm said...

It is not a forced dichotomy between austerity and default.

Instead, I think that every eurozone country, Greece included, should move 60% of its sovereign debt over to the ECB and convert it into Eurobonds.

Greece will still pay off principal and interest of the debt, but the interest rates will be far lower. And it will benefit from the fact that the Eurobond market is more centralized and less volatile.

Greece will still have it's own sovereign debt equal to 27% of GDP next year, but that will be far more manageable.

What's more, the ECB can take advantage of the fact that there is a banking crisis: offer liquidity and re-capitalisation to banks in the eurozone that need it, in exchange for haircuts on the existing sovereign bonds and speculative assets in their portfolios.

It's a win-win. Greece will not have to default, the banksters and investors get their money, and the Greek electorate does not have to undergo vicious austerity measures.

Kristopher said...
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Kristopher said...

"Our Board of Directors have taken a vote and decided against returning any of the money you have in your savings account"

pretty sure the board of directors can vote to decide if the a company files for bankruptcy...

but whether or not it is voted upon is not the issue. that is how decisions are made in democracy. the issue is that they have to make a decision. that decision is whether they should have a 100% defualt or a 50%default plus austerity measures.

given that bankruptcy is a legal and wellknown mechanism in our society. when somoene takes a loan they are not just agreeing to pay back the money they owe no matter what. they are agreeing to pay back the money or declare banruptcy. both parties were aware that both options were viable options of ending the agreement when the loan was agreed upon.

the governemnt agreed to pay back certain loans

the government also agreed to perform certain services.

either way they are going to have to break some of their commitments. a discussion about which ones to break and how much to break them is a legitmate discussion and voting is a legitimate way for a democracy to make a decision.

your argument seems to be that since one side is obviously better than the other that it should be a no-contest for a moral person. That simply is not the case in this situation. that would be the case of the governement was only beholdent to its creditors and the citizens were liable for the governments debts.

the government is beholdent to both the creditors that it owes money and to the citizens that it owes services. the creditors have made an agreement with the government regarding the debt but the government has not made an agreement with it's citizenss regarding the services owed. A yes vote would signal an agreement and a No vote would put them back at the negotiating table.

you seem to be under the impression that the greek government has the money but don't want to pay it. but i think it would be more accurate to say that the greek government does not have the money to honor their commitments but they potentially could have that money if they broke other commitments. a vote to decide if they should or should not break those commitments is not an no contest decision. furthermore if they need to talk to their crditors before altering a commitment shouldn't they also need to talk to their citizens before altering those commitments?

for example: 100 people pay tom a yearly subscription based on a percentage of their wages for tom to take out the trash and mow their lawns and tom takes out a loan to buy a garbage truck and a lawn mower.

everything is going good until the economy takes a nose dive, salaries are lower and some of the people are unemployed, his buisness is no longer profitable and goes into the red.

the people have already paid their subscription and are demanding therefore that he continue the services he promised to preform.

the banks demand he continue to pay the loans. but they see he is in a tight spot so they tell him they will forgive 50% of the money if he only focuses on the lawn mowing service and discontinues the costly trash pick up service.

this is not a no-contest decision unless the subscribers also agree that he can cut the services that he agreed to provide for their subscription. and having them take a vote to make this decision is not crazy. It is up to them if they want to agree with the creditors proposal and salvage Tom's buisness or let it go under.

the fact that they all own a little stock in Tom's buisness does not make them liable for his debts (that is U.S. corporate law) so that should not factor into the decision of what he owes them in terms of his services.

Anonymous said...


Why is it immoral for a polity to reject an immoral austerity imposed by ideologues? Surely you realize the way to minimize suffering to get Greece out of the Euro, let the Drachma float and pay back the loans with devalued currency. Anything else guarantees much more suffering. The referendum will get the ball rolling, and so prevent much innocent suffering. Surely innocents suffering needlessly is a moral evil in your book? If you want to punish everyone as harshly as possible for the bad debts, just keep imposing mindless austerity, and enjoy the cycle: austerity leads to economic contraction which leads to more austerity. Eventually you get violent revolution. I'd say that's more immoral than either defaulting or paying back with a devalued currency.

Alonzo Fyfe said...


I think that your claim, "The way to minimize suffering is to get Greece out of the Euro."

One of the aids to economic efficiency is standardization. A common currency, a common language, a common system of measures, all of these boost economic efficiency.

One of the effects of kicking Greece out of the European Union is that differences in currency and other standards will immediately reduce the ability of Greek companies to buy and sell things in the European market. It will put up a wall - a low wall, but a wall nonetheless - that will tilt some scales in favor of companies within the Europen Union over companies outside - for a huge portion of Greece's most easily accessible markets.

Technically, there is no difference between paying back 50% of a loan, and paying back a loan in a currency that has been reduced to 50% of its former value. There is no reason to hold that one is better than the other. The effect on the creditor and the debter are the same.

Inflation is just another form of default. There is no advantage to be gained on that front.

Beastinblack said...

The EU is a corrupt, disgusting organisation that needs to end.

Kristopher said...

ack sorry for the double post i thought the first one got lost in when the page refreshed. (considering that i changed some of my opinions inbetween that must have been confusing) sorry!

mojo.rhythm said...

One of the aids to economic efficiency is standardization. A common currency, a common language, a common system of measures, all of these boost economic efficiency.

Sometimes a common currency can actually decrease efficiency. Because all the eurozone countries have the same money unit, they do not have individual monetary policies. The European Central Bank has to implement a one-size-fits-all programme for all of the countries simultaneously. To make matters worse, the ECB has been acting like a monetary disciplinarian instead of a central bank, decreeing that the eurozone countries cannot run deficits higher than 3% of GDP per year, and must keep their public debt levels at or below 60% of GDP.

Moreover, having different currencies is theoretically supposed to balance out trade, according to standard theory. Unless you are China of course ;).

Dimitris Martinis said...

Having grown up in Greece, I have little doubt as to whether the Greek society is generally "honorable and responsible". Corruption, bribery and special interests have ruled the nation for years. This isn't only on part of the politicians. Such ideology reflects on almost everyone, from the average folk who will gladly bribe a public doctor (goes both ways) to be treated better than others, to the professional tax evader who supposedly earns 9.000 euros a year, when he owns five luxury villas.

I am not optimistic as to the result of a referendum, if it is indeed the ethical course of action. Public rage has risen to dangerous levels and it seems this would be no rational decision.

Alonzo Fyfe said...


Yes, your claims are true.

It is also true that in the United States, having a common currency does not allow each individual state to set its own monetary policy. We also have to deal with a "one size fits all" problem.

However, historically, I think that the evidence supports the claim that the efficiencies of a common US currency outweighs the benefits of having 50 separate state currencies.