The interconnectedness of the global economy is probably one of the most understated realities of the modern world. It has done a lot of good, but ironically what many think of first when talking about economic interaction is the most recent catastrophe it has sparked. For Greece, that would be the 2008 financial crisis.
With such potential for disaster, are we really better off with such extensive economic integration? When Greece entered into the European Union, it removed many trade barriers and many of its producers found themselves unable to compete. Coupled with huge government deficit and a currency they could not actually print, Greece struggled immensely in the wake of the 2008 crisis. Although perhaps not the root cause of the Greek debacle, the country’s lack of economic independence certainly exacerbated the problem. Today, there are very serious talks of Greece simply leaving the Eurozone; it may have more to gain by being independent.
Debates like this are not new to the world political scene. In the last century, time and again countries all over the world have had to ask themselves: is it worth the trouble to maintain some sort of orderly economic interaction abroad? The Plaza Accord from 30 years ago is an example of countries collaborating on a compromise to deal with mounting economic pressures both domestically and internationally. From the standpoint of the United States, the problem originally stemmed from inflation, but when the Federal Reserve System chose to combat it by raising interest rates, net capital flows became such that the dollar appreciated to unprecedented heights. This made U.S. exports highly uncompetitive, so American industrial and agricultural lobbyists put immense pressure on the government to institute protectionist measures.
Although protectionism would seem to deal with the immediate worries of domestic producers, without changes in the net capital inflows, protecting uncompetitive U.S. producers/sectors simply means other more competitive U.S. firms pay the price. Furthermore, these protectionist policies risk isolating the United States from the rest of the world both economically and politically by sparking reciprocal trade barriers that not only negate any benefits achieved, but also make all involved parties worse off as a whole.
It is fortunate that countries were able to come together to engage in meaningful dialogue to come to a consensus, at least for the short-term. They implemented a coordinated depreciation of the dollar, avoiding the panic in financial markets that unilateral moves might have created. However, as speakers at the recent Baker Institute conference on the Plaza Accord noted, cooperation did not persist; as the initial worries of unstable foreign economic relations subsided, parties began to drift apart and pursue their own domestic objectives. Arguably, a similar mentality is surfacing in the EU with regards to Greece; as the “crisis” drags on, other EU members are becoming increasingly prepared for the potential impact should Greece decide to exit the EU and are less willing to compromise on domestic interests for the sake of an orderly Euro.
Between the events following the Plaza Accord and developments surrounding the Greek situation, perhaps it could be said that active international cooperation regarding economic relations tends to only work in the short run. Countries are likely to come together in the near-term to avoid sudden major destabilization, but in the long-term, no one is willing or able to carry the burden of upholding economic stability beyond their borders at the cost of domestic needs.
Kevin Guo is a sophomore at Rice University majoring in mathematical economic analysis and managerial studies.