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Will Greece Make It?

Greece has bought some time with a new package of financial support, but it remains to be seen whether the Greek government's promise of souped-up austerity policies will be politically acceptable and sustainable. History suggests some grounds for skepticism.

CAMBRIDGE – Greece has bought some time with a new package of financial support, but the country is not out of the woods yet. It remains to be seen whether the souped-up austerity policies that Prime Minister George Papandreou’s government has promised will prove to be politically acceptable and sustainable.

History suggests some grounds for skepticism. In a democracy, when the demands of financial markets and foreign creditors clash with those of domestic workers, pensioners, and the middle class, it is usually the locals who have the last say.

Britain’s exit from the Gold Standard in 1931 remains the historical landmark. Having made the mistake of restoring parity with gold at a level that left the economy desperately uncompetitive, Britain struggled for several years with deflation and rising unemployment. Industries such as coal, steel, and shipbuilding were hit hard, and labor strife became rampant. Even as unemployment reached 20%, the Bank of England was obliged to maintain high interest rates in order to prevent a massive outflow of gold. Eventually, increasing financial-market pressure pushed the country off gold in September 1931.

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