I believe that one of the biggest things that will occur in this century is the diminution of theories of national economics.
Instead, there will be an increasing need over the century for a new field of global economics. Along with theory will come a demand for international agencies to exercise more and more coordination among national economies in order to serve the interests of all countries.
Yes, perhaps we'll be heading for a global version of the Federation of Planets portrayed on the 20th-century Star Trek TV series!
What's happening in Greece and Argentina right now suggests that this should happen -- sooner rather than later. Each of these countries is in conflict with the national law of a foreign country. Greece is in conflict with German law, Argentina with U.S. law.
The Greek Dilemma
When the financial crisis of 2008 began, Greece was hit hard. The country suffered from increasing debt until 2014, when the economy began growing again. However, Greece's public debt grew so large that the International Monetary Bank (IMF), the European Central Bank (ECB), and the European Union (EU), together called the "troika," began freezing loans to Greece because it looked like the country would become insolvent.
The ECB has been keeping Greece afloat with weekly emergency liquidity assistance, while the IMF has been meeting with officials of the newly elected Greek government to work out a schedule of payments by Greece, the soonest being 450 million euro due today, April 9. Christine Lagarde, the IMF head, has been expressing confidence that Greece will meet its obligations and have a 3-percent growth of GDP next year.
However, many economists feel that Greece won't be able to achieve 3-percent growth. One is Alberto Gallo of the Royal Bank of Scotland. He believes Greek austerity is impossible, with 50 percent of young Greeks unemployed. He thinks Greece will instead end up with high debt-to-GDP levels.
Gallo reasons that the crisis occurred because, by law, the ECB can't monetize debt (i.e., turn debt into assets); because the euro zone has no fiscal union (so rich countries can't help poorer ones); and because the EU lacks flexible debt markets (for Greeks to sell their debt to).
Professor Gallo has run the numbers and believes that the solution is GDP-linked bonds. If allowed to sell GDP-linked bonds, Greece could pay more interest when its GDP is growing well, and lower interest when its GDP is growing less well. Martin Wolf of the Financial Times also suggests GDP-linked bonds as a remedy for the Greeks.
However, the real problem in the euro zone isn't the amount of debt that Greece has or will incur; it is the timing of the repayment of that debt. The problems in Greece are being exacerbated by Germany. The Germans have a huge export surplus. They could afford to help out Greece until it gets fully back on its feet. But that isn't going to happen! Why?
German constitutional law says the German national budget must be balanced every year. The Germans cannot wait for Greece to grow its GDP; Germany needs its loans repaid by Greece now so that it can balance its annual budget.
As a result, the Eurozone is about to take a huge hit just as soon as Greeks admit they can't pay by the deadlines Germany is demanding.
The Argentinian Dilemma
In mid-June of last year, Cristina Fernandez, the president of Argentina, refused to submit to what she calls "debt extortion" by creditors of Argentinian government bonds who reside in the United States.
These creditors, who brought suit against Argentina in a New York state court, are large hedge funds. They will not accept the deal that 93 percent of other bondholders agreed to with the Argentinian government during debt restructuring in 2005 and 2010. Fernandez calls these Wall Street holdout creditors organized by U.S. billionaire Paul Singer of NML Capital "vulture funds."
The timing of repayment has been an issue when it comes to the Argentinian debt as well. Last June the U.S. Supreme Court supported the New York state court's verdict by refusing to hear Argentina's request for an appeal. The Supreme Court, also ruling over a foreign power, ordered separately that Argentina's debt be paid in two weeks. Fernandez said Argentina couldn't pay by then, and it didn't.
Like Greece, Argentina immediately had holds placed on its funds by big international banks.
A key issue for Argentina is that U.S. courts, possibly in violation of the U.S.'s Foreign Sovereign Immunities Act of 1976, overrode a pari passu (equal terms) clause in Argentinian law that requires all bond holders be treated alike when defaults on sovereign bonds take place.
More Trouble Coming
Argentina and Greece aren't the only countries with debt crises. This week the Committee for the Abolition of Third-World Debt will determine which parts of Greece's debt "are illegal, illegitimate, unsustainable or odious."
Other countries audited or advised by the Committee about their sovereign debt include Ecuador, Paraguay and Venezuela. The committee hopes to put pressure on developed countries that are driving less-developed countries into bankruptcy.
Lawrence Summers, the former secretary of the U.S. Treasury,
told the Financial Times this week:
Other countries are legitimately frustrated when US officials ask them to adjust their policies -- then insist that American state regulators, independent agencies and far-reaching judicial actions are beyond their [US] control. This is especially true when many foreign businesses assert that US actions raise real rule of law problems.
If we want to fix international economic crises, we cannot have wealthier creditor nations unilaterally making national law that pushes poorer nations into bankruptcy.
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