Sovereign default is not new. It is typically caused by factors such as excessive short term debt, currency devaluation, crash in exports and of course faulty economic policies. The seeds of the Greek crisis were sown when it joined the EU. The problem has been building up ever since.According to a Forbes report, Greece has defaulted on its external sovereign debt obligations at least 5 times in the modern era – 1826, 1843, 1860, 1894 and 1932. The combined length of period under which Greece was in default during the modern era totaled 90 years, or approximately 50% of the total period that the country has been independent. Each time, Greece was allowed to come back and even made an entry into the Eurozone.Venezuela and Ecuador, with 10 defaults each, share the dishonor of being the greatest serial defaulters of the modern era. In most cases, sovereigns can get out of a default by printing more money at the expense of greater inflation. This option was not available to Greece since it had become part of the EU monetary union. And hence it is stuck. By agreeing to be a part of the EU, Greece has effectively given up a part of its autonomy.
The surprising development is that despite all the advances in understanding of economics, the decision was left in the hands of the citizens via a referendum, rather than a group of experts. Further, the language used in the referendum was neither clear nor simple, making it a clear case of bewilderment for the citizens. It was a case of politics taking precedence over economics. Greek citizens have the right to decide their future, but they ought to have been properly informed at least.Should Greece exit from the EU, its biggest challenge will be to introduce its own currency. Or it might be better off adopting some foreign currency like dollar, euro, etc as its operating currency.One of Greece’s finest contributions to modern times is the concept of democracy, which is actually the foundation for economic prosperity. Sadly, Greece has not been able to use this fantastic tool to solve its financial crisis. Perhaps, the Greek people will learn from their troubles this time and give us Democracy 2.0.