The rather sudden and unexpected decision by the Greek government to hold a snap referendum on the latest proposals from the Troika has caught everyone by surprise. Something does need to be done to bring this long running and seemingly never-ending merry-go-round to an end, one way or another. Whether this particular referendum will help resolve the crisis is open to question.
The basics are pretty well known. Greece is effectively insolvent. Its debt burden is too great for it to have any prospect of ever repaying this debt. The unprecedented additional austerity measures proposed by the Troika, in the view of most people, will only make things worse. Most of the additional loans go immediately back to the lenders in the form of repayments on previous loans. Hence the merry-go-round analogy. Very little of the loans go to helping the Greek population. While the greater the austerity the greater the long term damage to the Greek economy.
Yet the Troika seem even more determined than ever to force further austerity on Greece. As Paul Krugman puts it, it has been an act of monstrous folly on the part of the creditor governments and institutions to push it to this point.
How should Greece respond? The Syriza led government has responded by proposing to hold a referendum for next Sunday. The Greek parliament has voted in favour of holding this referendum. But will the referendum provide a clear cut result for a way forward?
Various international observers seem to think so. Paul Krugman for example supports the referendum for the following reason: “… until now Syriza has been in an awkward place politically, with voters both furious at ever-greater demands for austerity and unwilling to leave the euro. It has always been hard to see how these desires could be reconciled; it’s even harder now. The referendum will, in effect, ask voters to choose their priority, and give Tsipras a mandate to do what he must if the troika pushes it all the way.”
This is in line with the view of those who believe that leaving the Euro offers the best option for Greece, at least in the long run. Unfortunately the actual question being put to the Greek people does not support this interpretation. According to Reuters, Greeks will be asked the following question: “Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25.”
Alexis Tsipras, the Greek Prime Minister has stated that an emphatic “no” vote would strengthen Greece’s negotiation position. The obvious question here is negotiating what? An improved bailout agreement or an exit from the euro? The referendum question says nothing about the euro and only refers to the bailout agreement. There is a further doubt about the validity of the referendum and that is that the draft document referred to, in effect no longer exists. So the Greek people are being asked to accept or reject a proposal that is no longer available. What’s the point of this?
A further problem with the referendum is that in order to secure any kind of strengthening of Greece’s negotiating position, Greece needs to still be in euro by the time the referendum is held. Will it? The Greek government has asked the EU to extend the current agreement for another two or more weeks to allow the referendum to take place, but this has been rejected. Unless something is agreed today, Sunday, then on Wednesday, 1st July Greece will have defaulted on its repayment to the IMF. Before then, absent an agreement with the EU/ECB, there will most likely be a run on Greek banks. To prevent this the Greek government will have to declare an extended bank holiday and probably institute capital controls to prevent euros draining out of Greece.
This is where it all gets very messy indeed. Greece almost certainly needs to default on most, if not all of its debts. The real issue is whether this is done in an orderly and agreed manner, or is done abruptly without agreement. This could happen if Greece is either forced out of the euro, or voluntarily decides to leave the euro.
The big problem for Syriza is that all the indications are that a large majority of Greeks want both an end to austerity and to stay in the euro. Which is why the referendum question does not mention the euro. However if by the time the referendum is held, next Sunday, it is clear to all that a rejection of the bailout agreement means leaving the euro, how will the Greek people vote then?
For underlying all this is the uncomfortable reality that there is no good option for Greece in the short to medium term. And the long term may be a very long time coming. Leaving the euro will not bring about an end to austerity. It may change who suffers most from continuing austerity, but things are likely to get even worse for many Greeks with a euro exit. There is no short term, painless fix for the Greek economy.
A further complication is that many legal and economic commentators have opined that even with a default there is no need for Greece to leave the euro. In fact it seems there is no legal, treaty based way for any eurozone country to be expelled from the euro. So, at least in theory, Greece could default on some of its debt, and try and remain in the euro. What this might mean in practice is unknown and at the moment unknowable. Much would depend on how willing the ECB and Greece’s partner countries would react. The prospects do not look good.
A final point on the portrayal of the referendum as a battle between democracy and the nasty world of finance. This is just nonsense and not at all helpful. Democracy is not just for Greeks. A commentator on another site puts it nicely and succinctly. “It is normal that a vote in Greece is not binding for Germany, France, Ireland, and the poorer than Greece countries of Eastern Europe. The Greek vote is valid only for Greece’s government. The democratically elected governments of the remaining Euro Group are negotiating according to their own voters opinions. The outcome may please some and not others.”
I agree with Paul Krugman that the governments of the eurozone countries have been acting with monstrous folly in relation to Greece. Alas democracy has never guaranteed the election of sane and reasonable governments. In the eurozone all governments have the same democratic validity. It does no good to anyone to pretend that the wishes of the Greek people are more worthy than the wishes of others.