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 putting 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.
As I speculated yesterday, Prime Minister Papandreou explicitly said today that his main rationale for calling a referendum was to putting 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.
Why the Greek referendum is exactly the right idea
First, it is naive to believe the alternative was 'not holding a referendum'. With things continuing as they are, the government would have collapsed within the next few months, possibly in acrimonious circumstances. With virtually all Greek opposition parties reaching new heights of irresponsibility every passing day and the press following suit, things could not have continued 'as normal'. A referendum may actually turn out to be less disruptive than the alternatives.
Second, there's a genuine question to be asked here. Do the Greek people want to continue with Europe and the Euro and endure painful deflation and unemployment for years to come, or do they prefer to risk chaos and political alienation from their European peers for the possibility of a better tomorrow? Both alternatives are terrible, but the choice is real. At the time I'm writing this, the question that will be asked is not clear.
But if (as is likely) it is about Greek membership of the Euro or (less likely) about supporting the latest measures, I do not know which way I will be voting. No Prime Minister can - or should - take a decision of such gravity by himself. The people should vote.
Third, whichever way the referendum goes, Greece will benefit compared to a scenario where the government acts on its own. If the answer is 'yes to Europe' (and contrary to everything Greek and foreign pundits have been saying, this is the way I believe the referendum is most likely to go), Greece will have made a credible commitment that it will not be exiting the Euro any time soon. This is extremely important, as it will reverse the slow motion run on Greek banks and the corresponding flight of investment away from Greece. Furthermore, explicit popular support for austerity means that protests will be that much less disruptive and the resolve of the government that much more resolute. These will be welcome developments.
If, on the other hand, the answer is 'no', it only speeds up the inevitable. And unlike the case where the government chooses (or is forced) to take a decision to leave the euro, the people explicitly voting to do so will lessen the unrest that is likely to follow.
There is, of course, the risk that things will get out of hand (by which I mean a full blown bank run and violence on the streets) even before we reach the day of the referendum. This becomes uncomfortably likely if it starts looking like the answer will be no. The fact there hasn't been a bank run or chaos in the streets yet is a good sign, although it is no guarantee things will go smoothly. But as I've already said, there are no good or 'safe' choices on offer to the Greek people here.
Finally, there's another reason why I think Papandreou was right to call a referendum. It is a much needed reminder that Greece remains a sovereign nation, and that the Greek people will not be passive witnesses while their European peers decide exactly how much they should help Greece and how much punishment it deserves. If there's one thing that Germany et al have made abundantly clear in words and deeds throughout this crisis, it is that there is no European nation, and the only reason they display 'solidarity' is to protect the German/French/Finn citizen and taxpayer. I struggle to understand why Greece should be expected to behave any differently, and why Europeans express amazement at the desire of a nation to be treated with respect.
Second, there's a genuine question to be asked here. Do the Greek people want to continue with Europe and the Euro and endure painful deflation and unemployment for years to come, or do they prefer to risk chaos and political alienation from their European peers for the possibility of a better tomorrow? Both alternatives are terrible, but the choice is real. At the time I'm writing this, the question that will be asked is not clear.
But if (as is likely) it is about Greek membership of the Euro or (less likely) about supporting the latest measures, I do not know which way I will be voting. No Prime Minister can - or should - take a decision of such gravity by himself. The people should vote.
Third, whichever way the referendum goes, Greece will benefit compared to a scenario where the government acts on its own. If the answer is 'yes to Europe' (and contrary to everything Greek and foreign pundits have been saying, this is the way I believe the referendum is most likely to go), Greece will have made a credible commitment that it will not be exiting the Euro any time soon. This is extremely important, as it will reverse the slow motion run on Greek banks and the corresponding flight of investment away from Greece. Furthermore, explicit popular support for austerity means that protests will be that much less disruptive and the resolve of the government that much more resolute. These will be welcome developments.
If, on the other hand, the answer is 'no', it only speeds up the inevitable. And unlike the case where the government chooses (or is forced) to take a decision to leave the euro, the people explicitly voting to do so will lessen the unrest that is likely to follow.
There is, of course, the risk that things will get out of hand (by which I mean a full blown bank run and violence on the streets) even before we reach the day of the referendum. This becomes uncomfortably likely if it starts looking like the answer will be no. The fact there hasn't been a bank run or chaos in the streets yet is a good sign, although it is no guarantee things will go smoothly. But as I've already said, there are no good or 'safe' choices on offer to the Greek people here.
Finally, there's another reason why I think Papandreou was right to call a referendum. It is a much needed reminder that Greece remains a sovereign nation, and that the Greek people will not be passive witnesses while their European peers decide exactly how much they should help Greece and how much punishment it deserves. If there's one thing that Germany et al have made abundantly clear in words and deeds throughout this crisis, it is that there is no European nation, and the only reason they display 'solidarity' is to protect the German/French/Finn citizen and taxpayer. I struggle to understand why Greece should be expected to behave any differently, and why Europeans express amazement at the desire of a nation to be treated with respect.
