The economic consequences of the referendum that wasn't

The referendum may not be happening, but yesterday's events will have a deep impact on Greek and European affairs.

As I speculated yesterday, Prime Minister Papandreou explicitly said today that his main rationale for calling a referendum was to putt a stop to speculation that Greece is considering exiting the Eurozone. The chain of events that led to the referendum being called off demonstrated beyond doubt that the political classes will be keeping Greece in the Euro at all costs.

The fact there is now a credible commitment is very important. It means that some of the funds that have exited the country will find their way back to its banks and its economy, it means that bond investors need not fear Greece inflating its debt away or engaging in unilateral funny business, and it means that a great source of uncertainty has been dealt with.

This is not to say that staying the Euro is the right course of action for Greece. But since this seems to be what a majority of the Greek people want, making a binding commitment is the right way to go. There will be more investment, lower spreads, and an increased willingness of the rest of the EU to engage constructively.