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Azeem Ibrahim

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Greek Tragedy -- The Next Act

Posted: 11/04/11 02:05 PM ET

Whether Greek Prime Minister, George Papandreou, is still leading his country next week or not, someone has to stop Greece from sliding into default and further calamity. The latest rescue deal suggested by the Eurozone countries has already been described as "too little, too late" by George Soros, as investors share their skepticism about the latest attempt to stop the economic decline in Greece. There will be another crisis, Soros said, because the fundamental issues have not been settled and the country is effectively insolvent.

The EU-IMF's bailout terms include debt restructuring with a heavy debt repayment schedule for Greece starting in 2012. This will mean further austerity measures for the Greeks who are suffering already from rising unemployment and the deterioration of public services and the standard of living. Papandreou's stunning announcement that he would hold a referendum in January to ask the Greek people to approve the deal, has shaken his own party and the Eurozone leaders to the core. If the referendum takes place, which is now in doubt, and the Greeks reject the plan's deep spending cuts, they will be risking a full-scale default and possible ejection from the Euro.

Commentators are still coming to terms with Papandreou's announcement. It is a remarkably democratic move in a world dominated by financial markets, more used to deciding at great speed measures that are good for international banks and national economies, with no consultation and little concern for the citizen who must tighten his belt, get another job, renegotiate his mortgage if he can.

While we can stand back and admire the Greeks, the originators of democracy after all, for the proposal to allow people to decide their future through the ballot box, it is sad to realize that Greek-style democracy has become old-fashioned and out of date. Decisions of this magnitude are now made in the palaces of Europe by the Euro-elite and the big European banks and their friends in Wall Street who will all suffer if Greece defaults.

After all, where would we be if American citizens had been allowed to have a referendum on bailing out Wall Street? Congress acted hastily on advice from the feds and allowed the Main Streets of America to suffer the consequences. Maybe if Americans had been consulted in a democratic referendum, the banks would have been forced to absorb the losses of the predatory mortgages they sold and made to help homeowners reduce their mortgages. Small community banks would have been saved and stringent regulations could have been restored.

Greece's quixotic suggestion that people's votes still matter will probably have been brushed aside by future events. It was reported that the French government described Papandreou's referendum as "irrational and dangerous," Angela Merkel called it "irritating" and Berlusconi thought it was "negative." The Athens establishment too was against the idea, describing it as "an act of political blackmail" and the Prime Minister may have already lost his job with a vote of confidence in the Athens parliament called for Friday.

According to a recent article in Money Week by Bengt Saelensminde, the bailout fund created in May 2010 by the European Financial Stability Facility (EFSF) is now looking inadequate, as instead of buying up bonds, the plan is instead to insure the first 20% of losses on the bonds. Once this "insurance" money has been paid out, they will be back to the same position again and this time the EFSF will be completely empty.

Saelensminde says that the only solution is for Greece to return to the Drachma, to convert Greek euro debt into Greek Drachma debt, one for one, and let the new currency float. Imports will become expensive but Greeks already own more German cars per head of population than New York or London. Tourism should bounce back, business and individuals with Greek debt should profit and once Greece acknowledges that it cannot compete with the German business model, and can no longer share the same currency as the Germans, Greek wages should stabilize and exports should thrive.

The bright dream of European Monetary Union established by the Treaty of Maastricht in 1992, is starting to look rather tarnished. For more than three years now, Greece has been stumbling along, its economy faltering, inflation spiking and exports hobbled by the surge of the Euro against the dollar. Greece, said Thomas Mayer, the chief European economist at Deutsche Bank, is an "accident waiting to happen."

Like the inexorable approach of the fates in a Greek tragedy, that accident is approaching fast with no deus ex machina waiting in the wings to provide a satisfactory ending.

Dr Azeem Ibrahim is a fellow and member of the board of directors at the Institute of Social Policy and Understanding and a former research scholar at the Kennedy School of Government at Harvard and World Fellow at Yale.

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