(This essay was published in South China Morning Post on 11 February 2015.)

Both Greece and Hong Kong have unified exchange rate regimes. Greece, as a member of the Eurozone, uses the Euro as its local monetary unit. Hong Kong, under the linked exchange rate regime, uses a local monetary unit fully backed by the US dollar at a fixed rate.

Both economies have surrendered monetary independence to an external monetary authority. Yet they face situations from time to time when the requirements of global economic integration conflict with the demands of a political democracy.

Greece faced such a situation after it went into economic recession following the 2008 global financial tsunami. Hong Kong experienced two such situations, first in 1997 with the onset of the Asian Financial Crisis and then after the 2008 financial crisis.

After Greece joined the Eurozone, its economy became deeply integrated with that of Europe. There were considerable initial benefits. Greece was allowed to borrow huge sums of Euro dollar loans at low interest rates from French and German banks. But after amassing an enormous foreign debt, Greece, unsurprisingly given its legendary fiscal profligacy, had great difficulty servicing it.

In the run-up to its debt crisis in 2010, the Greek government’s primary budget deficit (excluding interest payments on its debt) was 10% of national income. When the debt crisis erupted, the financial markets went into turmoil over how this would be resolved.

The agreement struck in 2012 required Greece to undertake deep fiscal austerity measures to repay international creditors. Today, the Greek debt-to-GDP ratio is an unsustainable 175%. Greece is paying about 4.5% of its GDP in interest and its economy has contracted every year since 2008. Unemployment stands at 27.5%.

Facing these tough economic conditions, the Greek electorate wants fiscal relief. A new round of negotiations on debt forgiveness and debt rescheduling will commence. Debt forgiveness is unlikely because the German electorate will not support that. Exiting the Eurozone would be extremely unwise because it would cut Greece off from international credit. So negotiations will focus on making the fiscal austerity measures less harsh and allowing more time for them to take effect.

The conflict behind the debt crisis pitches the interests of the German electorate against the Greek electorate. The unfolding events demonstrate that politics everywhere is domestic in nature, especially democratic politics. And the requirements of democratic politics conflict with those of deep economic integration and the policy discipline imposed by unified exchange rate regimes.

Hong Kong suffered through six years of deflationary pressure following the 1997 Asian Financial Crisis because its currency was fixed to the US dollar. Almost every Asian economy devalued its currency at the time to soften the effects of economic recession and deflationary pressure. But Hong Kong did not devalue and stood firmly committed to the linked exchange rate arrangement.

The cumulative impact of that decision meant that from 1997 to 2003, consumer prices fell 11.6%, the GDP deflator fell 17.5% and nominal GDP fell 9.5%. Real GDP rose 8% because of the steep fall in prices.

Unemployment peaked at 8.8%. Real interest rates peaked at 9.8%. Real property prices fell 61% from peak to trough. Property owners were severely hurt.

Since 2008, however, quantitative easing adopted by the Federal Reserve, and later Japan and Europe, has reversed the effect. During 2009-2013, unemployment averaged around 4.0%. On a cumulative basis, consumer prices rose by 19.5%, GDP deflator by 9.1%, nominal GDP by 24.5%, and real GDP by 14.1%. Property prices have risen by 134% from both internal and external demand, benefiting property owners but not the many families who do not own property.

The growing wealth gap between those with and without property has become a permanent legacy of our economic crises and the primary source of political divisions in our society. They are not about to go away anytime soon. Hong Kong may not be a political democracy, but the people are not shy to vent their frustration on the streets in massive numbers, fortunately through peaceful means, at least for now.

The Greek electorate can elect the extremist Syriza government to vent their anger and frustration, but sadly they cannot vote away their economic problems. Similarly, neither marching on the streets nor introducing more democracy will narrow the property wealth gap between Hong Kong’s “haves” and “have-nots”. Hong Kong needs a smart housing policy and Greece needs a sound economic growth strategy.

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