Greek referendum — the right step at a dangerously wrong time

greferendum

For the past 48 hours, the rest of Europe and, indeed, the rest of the world have watched Greece come unhinged. Greece Flag Icon

In a speech shortly after midnight Friday night, prime minister Alexis Tspiras announced that instead of continuing negotiations between the Greek government and the Eurogroup of eurozone finance ministers, he would call off talks to hold a referendum next Sunday, July 5, thereby putting the question to the Greek people — will they accept the terms of the latest deal with Greece’s creditor institutions or will they reject it?

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Never mind that the creditors’ offer could be moot by next Sunday.

Never mind that Greece faces, at best, a technical default on Tuesday.

Never mind that the referendum caught everyone else in Europe off guard, eliminating what little goodwill Greece had left.

Never mind that Greece’s constitution seems to forbid direct referenda on fiscal matters.

Never mind that it seems to be accelerating a financial crisis now mandating extraordinary measures in Athens.
Almost immediately, however, Greeks began voting in another referendum of sorts, withdrawing nearly €1 billion in deposits from Greek banks by Saturday alone. By the time July 5 rolls around, Greece could find itself in a much more desperate position than they are even this weekend. On June 30, Greece must make a €1.6 billion payment to the International Monetary Fund. No one believes the government, which rolled smaller payments due earlier this month into the larger payment now due Tuesday, has the funds to meet its obligation. Short of a truly bizarre ‘plan B,’ like a loan from Russia, Greece will essentially be bankrupt in 48 hours.

Though failure to make the payment might not technically constitute default, there’s some ambiguity in how quickly the IMF will respond and, perhaps more importantly, legal flexibility in how quickly the European Central Bank might halt its emergency liquidity funding to Greek banks.

That flexibility seemed to be coming to an end Sunday, however, with ECB president Mario Draghi likely to end what amounts to €89 billion in ELA funding. That has kept Greek banks afloat as depositors slowly withdrew around €35 billion capital since last November, when it became likely that Greece would hold early national elections and that Tsipras’s far-left, anti-austerity SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς), would win. So far as the Greek government remains solvent, as a technical matter, the ECB continued to keep Greek banks operational. That all changes now that the ECB is closing the spigot to ongoing liquidity — at exactly the point when Greece’s long-running bank jog seems to be turning into a bona fide bank run. There were already worrying signs this weekend as consumers queue in longish, if still short of full-panic, ATM lines.

Bowing to the inevitable, Greece’s government decided late Sunday night to institute a bank holiday for the next week, including a halt for the Athens stock exchange and a daily withdrawal limit of €60 per day. Long-term capital controls seem likely to be implemented. In an address Sunday night, Tsipras announced the bank holiday measures and all but called for a ‘no’ vote next weekend, arguing that the imploding crisis will create ‘resolve’ among the Greek electorate to reject the ‘absurd’ proposals of the European institutions and the IMF. The decision came just hours after Greek finance minister Yanis Varoufakis railed on Twitter against capital controls:

It’s hard to see how the referendum, under such duress conditions, will be a calm and rational decision of the Greek people. The first polls seem to indicate that Greeks will choose the misery they know over the possible misery they don’t — a Kapa Research poll for ‘To Vima’ indicates 47% would vote ‘Yes’ and 33% would vote ‘No.’

In the meanwhile, European leaders blindsided by Tsipras’s rash decision to hold a referendum refused his request to extend Greece’s bailout long enough to conduct the vote in an emergency decision of the Eurogroup (unanimous except for Varoufakis, Greece’s absent representative).

The sudden turn, fraught with the kind of uncertainty and confusion that could spur instability throughout the eurozone, is all the more surprising after Tsipras’s government appeared to reach a deal earlier last week with creditors, albeit one that would have raised corporate taxes and the value-added tax on basic goods, including foodstuffs, and especially on hotels and other tourist-oriented industries. The IMF, however, balked at the proposal, marking up the Greek proposal to demand more cuts to Greek pensions and government spending generally — the redline was so condescending that the IMF’s economists attempted to change the grammar of the Greek proposal. In Tsipras’s defense, economists almost universally agreed that the bailout extension, which would win Greece just six more months of relief, would force the country even deeper into recession. But by creating so much uncertainty over Greece’s future, Tspiras’s government has already helped destroy a nascent recovery over the past five months. Even sympathetic allies, who largely agree that the IMF and European bailouts were far too harsh to ever give Greece a chance for recovery, are out of goodwill for a amateurish government that lacks any long-term vision for where it wants to take its long-suffering country. If you date the beginning of Greece’s acute financial woes to the 2008-09 global recession, it’s a country that’s spent more time in crisis than not since joining the eurozone in 2001.

Tsipras won election by promising that he could wring more concessions from EU leaders, thereby reducing the impact that six years of bailout-imposed austerity has wrought in Greece, where GDP has contracted to around 75% of its level in 2008 and where unemployment has stubbornly remained above 25%. But Tsipras overestimated his ability to demand a better deal, with German chancellor Angela Merkel and others convinced that a Greek default, or a ‘Grexit’ from the single currency, would not be nearly as catastrophic as it would have been in 2010 or 2011 or 2012. Two bailouts have given private-sector finance an opportunity to reduce exposure to Greece’s potential default, so there’s less of a chance for ‘contagion’ throughout the rest of the eurozone.

But Tsipras overpromised the electorate that Greece could end austerity and still remain in the eurozone. That now seems naive. Even as members of his own government urge a ‘no’ vote next Sunday, Tsipras and Varoufakis, were insisting that the referendum wasn’t necessarily a choice between keeping the euro and restoring the drachma. That now also seems naive.

In theory, at least, the idea of giving the Greek people the opportunity to chart its own future is noble. But the EU/IMF proposal might not even be on the table by July 5, five days after the Greek bailout is set to end. Greece’s creditors have been consistent even before Tsipras’s election — they’ve stood firm against any immediate debt relief (though most people doubt whether Greece will ever be able to service €240 billion in debt). The contours of a deal have been clear since the spring, and Tspiras could have called a much more orderly vote on Greece’s future much earlier. Calling a referendum now seems like a cynical ploy to avoid responsibility for the consequences of either accepting or rejecting the current deal with the Eurogroup.

In October 2011, then-prime minister George Papandreou, then the standard-bearer of the Greek left, proposed a referendum on the terms of an earlier EU-led bailout plan. Under pressure, he cancelled those plans three days later and promptly resigned, leading to a caretaker national unity government and snap elections in May 2012. Then, as now, critics pointed out that the Greek constitution expressly prohibits direct referenda on fiscal matters, which casts some legal doubt on Tsipras’s latest gambit.

Tsipras also faced significant opposition within SYRIZA to agree any deal that lowers Greek pensions. For a party of outsiders that rose out of the tradition of Greek communism, forcing a vote on any deal could have split the party, forcing Tsipras to call snap elections and seek a national unity government.

The decision to call a fresh referendum was also a politically controversial decision within Greece’s national politics. Former prime minister Antonis Samaras, the leader of the center-right New Democracy (Νέα Δημοκρατία) that led the government between June 2012 and January 2015, condemned the referendum and called a vote of no-confidence against Tsipras. Stavros Theodorakis, a former television journalist and the leader of the center-left To Potami (Το Ποτάμι, ‘The River’) had increasingly offered his party’s support for a more centrist coalition that would have backed a Tsipras-brokered deal. But Theodorakis denounced the referendum in harsh terms on the floor of the Hellenic Parliament Saturday as the government successfully passed legislation authorizing the July 5 plebiscite:

“Alexis Tsipras and (Independent Greeks leader) Panos Kammenos decided to lead the lobby of the drachma, to take the country out of the European Union and push it over the cliff,” … Theodorakis said in a statement.

The coming week promises to be the most unpredictable and potentially dangerous since Greece’s crisis began. At best, Greeks will decide between a bleak, austerity-ridden future in the eurozone and a potentially bleaker future outside it. Economic gravity, however, might overtake politics before next Sunday, effectively making the choice for Greece well before. But even if the referendum delivers a clear verdict, the path after July 5 isn’t clear — the Greek economy might not survive a ‘No’ vote and the Tsipras government might not survive a ‘Yes’ vote.

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