I set off a bit of a firestorm on Twitter this afternoon when I said Greek Prime Minister Papandreou should not shrug off his duties to understand the EMU’s monetary system and his country’s economy onto his people via this referendum. Steve Randy Waldman, Edward Harrison and several others took issue with the comment saying that Democracy should decide. I actually agree. But let me explain.
The role of elected officials within a Democracy or a Representative Republic is to understand complex issues and act on them at times when the country is in need of decisive leadership. Papandreou has failed in this regard. He has failed to understand what is ailing his country and he has allowed the northern nations to impose austerity on his country with the false belief that this would fix their problems. This all leads back to a fairly basic misunderstanding of the EMU and its flawed construction.
The EMU is incomplete in that none of its members have the ability to create their own currency, but are interlocked in a single currency system whereby they are essentially currency users without a floating exchange rate. This has resulted in inherent imbalances between trade deficit and trade surplus nations. How can you rectify this imbalance? It is my opinion, that there are only two reasonable options. They must complete the union via the formation of a full fiscal union (as the USA did in 1790). Or they must revert back to the system of old where each nation has its own currency and can utilize that currency in the manner that best benefits that particular nation. My personal belief is that the USA has provided a fairly stellar model for this system and if implemented in Europe, could be quite beneficial to all involved. Of course, there are the hurdles of history here and this is all easier said than done.
What’s clear from the last few years is that the leadership in Europe has continually misunderstood this system and its operational aspects. Papandreou has had a fair amount of ammunition at times during this crisis, but his misunderstandings have led him astray. He holds the fate of the EMU in his hands to a large degree. This system has failed the Greek people and their leaders should understand exactly why it has failed them. Their decision should never have been: “do we accept austerity or not”. It should have been: “Dear Angela Merkel, we demand a full fiscal union or we are leaving. The ball is in your court”. In this regard, there has been a massive failure in Greek leadership. And I believe Papandreou has displayed consistent ignorance and now cowardice in putting this decision in the hands of a public who cannot be expected to fully understand the complexity of the issues Greece confronts. In other words, Papandreou has failed to execute the role that he was elected to perform.
Some have called me “elitist” for implying that the Greek public cannot be relied upon to understand these matters and formulate rational decisions. This is, in my opinion, our unfortunate reality. The monetary system is complex. I have literally spent years of my life trying to understand all of this. At many times, 24 hours a day 7 days a week. It has been a full-time job. And I still don’t understand it all. And I think it is unreasonable to expect your average citizen to understand the breadth and scope of all of these issues. After all, the average American thinks the USA is bankrupt despite the fact that this is categorically false (there’s no such thing as a sovereign currency issuer “running out” of money it can freely print and becoming insolvent in the same manner as Greece or a household). Can we really expect the public to always make rational decisions about such complex issues? Or should we demand that our elected officials understand these issues well enough to make competent decisions on our behalf? I think it is absurd to believe that our leaders (elected or not) should not command a better understanding of these issues than your average citizen. There’s nothing “elitist” in expecting that. It should be common sense. I expect Ben Bernanke to have a better understanding of banking than your average citizen. I expect Tim Geithner to understand the impact of government spending. I expect Barack Obama to understand the modern monetary system (or at the very least, have advisers who can keep him well informed). Is that too much to ask?
This is not your average political issue. It is about the construction of the system that is going to influence every European citizen’s life for the rest of their life. And while it might be idealistic to sit around and think that the average Greek citizen can understand these complex issues and formulate rational and logical decisions, I think that is a bit naive. Instead, I believe that the average Greek citizen should elect officials with the understanding and expectation that they will understand these issues and act on them when needed. This does not absolve the public of their responsibility. In fact, it is the very essence of Democracy. And if that leader should fail the people then he/she should be thrown out and replaced with someone that the public feels can better perform those duties. This is how Democracy works. We should have very high expectations of our elected officials (and those who are appointed by elected officials). We should expect that they understand highly complex issues better than your average citizen so that they can be prepared to act in the best interest of those who elected them.
Greece’s leaders have failed the people. But that does not justify Papandreou’s decision to absolve himself of his responsibilities and place such complex issues in the hands of the public. Papandreou should have better understood these issues long ago and his failure to do so has directly led to the unrest in Greece. He is unfit to serve his people. But that does not justify his recent actions.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.