Tuesday, June 30, 2015

An Existential Referendum

By Roy C. Smith

The referendum may be the best way for ending the drama in Greece, but it comes at a price.

Last week the European “Troika” finally put its take-it-or-leave-it terms on the table. It was generally assumed that Prime Minister Tsipras would grudgingly accept the deal and life would go on. Instead, Mr. Tsipras surprised everyone with a 1am announcement on  Saturday that he would ask parliament for a referendum to determine whether Greece should accept the deal (he thinks it should not), but, not necessarily with the presumption that if it did not, it would be forced to withdraw from the euro, and maybe the EU.

There has been general agreement among statesmen and economists for months that, although it is entitled to try for the best deal it can get, both Greece and the Eurozone would be better off if Greece remained in the euro.

This proposition is certainly debatable.  Greece has never been a first-world economy, so its entrance into a union with other countries that are may have been a mistake.  After five years of budget cuts and a variety of other austerity measures, massive additional borrowing from ECB, and a cram-down restructuring of private sector debt, the Greek economy, unlike other countries receiving similar assistance, has failed to achieve a “normal” recovery.

And, from the beginning its politics have been far more confrontational and uncooperative than those of the other aid recipients. Even if Greece should accept the last offer made by the Troika, there is no assurance that it won’t be back in the future acrimoniously demanding further concessions.

Better to recognize the economic and political realties of the Greek situation, many have concluded, and arrange for it to leave to euro.

But the referendum play has changed things.

Yes there will be a technical default, but it can be resolved within 30 days with impunity.  Yes there will be a run on the banks, but this can be halted by a weeklong bank holiday. And, yes if the Greeks vote to accept the deal to stay in the euro, the Troika will be willing to extend the current deal to the (probably new) government that will be mandated to accept the reforms and other measures to normalize the economy.

If recent polls showing a substantial majority of Greeks wanting to stay in the euro, (despite approving Mr. Tsprias’ efforts to negotiate a better deal) are right, then the referendum could settle things once and for all.

But as US statesman and economist Larry Summers has said on the subject, “this may be an experiment you don’t want to run.”

First, because the Europeans might lose. Maybe there will be a “Zorba” moment among the electorate and Greeks will decide they would rather die than accepted humiliation, especially if the pros and cons are not properly explained to them in the few days that remain before they have to vote.

A no vote would be especially harsh on Greece, at least for a few years. But it has consequences for Europe too. The European Financial Stability Fund, the European Central Bank and possibly other European banks will have to shoulder large write-offs.  There will be market turmoil for a while, although this may be offset by the relief that the external part of the Greek tragedy has finally ended. (Greece’s influence on world financial markets has vastly exceeded the value of expected write-offs and other consequences).

There is also a fear that a cut-loose Greece may collapse into a failed state subject to all sorts of undesirable political consequences. Greece has been through political chaos several times in its relatively short life as an independent nation, including civil war and conditions that ended in military rule.  Chaos might also, as the Greek negotiators threatened, attract Islamic terrorists into the country, hoping to breach the territorial wall of Europe.  If so, this would raise hard questions about Greece’s ability to remain in NATO.

And finally, and perhaps most insidiously, a referendum in Greece on continuation in the Eurozone, together with the promised British referendum on remaining in the EU, could create further political demands for similar referenda in other countries that belong to the Eurozone or the EU.

The outcomes of such referenda have almost always been unpredictable. In 2005, referenda on approving the then proposed European Constitution, though passed in several countries, were defeated in France and The Netherlands, after which the Constitution was abandoned.

Recent public opinion polls in the UK show as much opposition to the EU as support for it. Other polls have convinced many European politicians that popular support for the EU is significantly less than among the better informed political and business leadership. Referenda, therefore, are risky events. A couple of defeats could send the EU and Eurozone back to drawing boards, from which, like the Constitution, they may never reappear.

So the Greek drama has a powerful and existential final act to go.

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