The Greek Referendum: between a petros and an ákmonos

The looming Greek referendum is billed as a vote on the offer from the IMF, ECB and EU (the ‘Troika’, from the Russian тройка meaning ‘set of three’), who made an offer of a third financial bailout on 25th June. Even if the Greeks vote yes, it’s not entirely certain whether that offer still stands as June 30th was the day bailout funding ran out, and the day Greece was due to repay €1.5 billion to the IMF, and the IMF has been reported as unwilling to participate in further bailouts without a much longer term rebuilding plan for the country.

Greece asked for an extension for a few days to arrange the referendum. Request denied.

It’s also a vote on the current Greek PM and his party. A yes vote would likely trigger a general election, and weeks or months of uncertainty as well as deep cuts and large tax hikes. Many Greeks would see this as essentially giving up their sovereignty to the Troika at that point. Again the waters are far from clear on this point; Greek Finance Minister Yanis Varoufakis has said he will resign if there’s a ‘Yes’ vote, Prime Minister Alexis Tsipras seems to have changed his position on this point several times in last week or so, but it’s fairly clear his (and his government’s) position would become untenable having campaigned as an anti-austerity party.

A ‘no’ vote isn’t much better, as it still leaves Greece massively in debt and unable to pay it’s internal bills — wages, health, education etc. There aren’t many (or any?) places Greece can go for more money. It would have to pay with IOUs, which would immediately form a new currency with no backing or international value. Devaluation and financial chaos would quickly follow making an already tough situation tougher.

Potentially it’s also a vote on Greece’s membership of the EU and the Eurozone, a ‘no’ vote would be pretty likely to trigger an exit from at least one, if not both. The euro as a currency relies on the beleif that no one leaves, and the poorer countries are economically protected by the richer. Although any economist worth a light has seen this coming markets have historically reacted after the fact to ‘obvious’ events, so it could well trigger further euro exits and a decrease in faith in the euro as well as a devaluation, harming the rest of the eurozone.

So how did it come to this?

In 2001 Greece joined the eurozone, making it suddenly much more attractive to outside investors and lenders. Before joining the euro Greece (and the drachma) was seen as a risky proposition for investors, with an under-developed economy, poor governance and an atrocious tax collection record. Joining the euro was seen as fixing all that, and anyway, the rich European countries would never let it fail. It was like Greece suddenly had Mum and Dad guaranteeing all it’s loans.

For a while it seemed to be working. Growth topped 4%, unemployment fell, tax revenues increased and banks were happy to lend at low interest rates secure in the knowledge that Mum and Dad were on top of things. There were strict limits set on maximum deficits, tax collection, and a host of other fiscal controls designed to stop this happening to a eurozone country.

Greece soon started running up huge debts. Public spending was out of control, famously public sector employees were paid ‘13th and 14th month’ salaries — double pay over holiday periods. And the european banks were happy to overlook the political corruption and endemic tax evasion and continue lending to them. Then the 2008/09 financial crisis hit.

Time to ‘fess up.

Like most of Europe, Greece suffered in the credit crunch. The problem was they hadn’t been totally straight about their situation. The deficit was running at over 12%, four times the limit set by Eurozone controls. Debts had piled up and been swept under the carpet. Mum and Dad had taken their eye off the ball. This was never meant to happen.

With its financial problems now public knowledge it became impossible for Greece to raise new loans to fund existing debts. The government embarked upon a massinve austerity drive; huge cuts in public services and large tax increases.

Uncle Troika to the rescue.

Based on the expected success of the harsh austerity measures the Troika (The IMF, ECB and EU) agreed to a €143 billion bailout loan to allow Greece to service its debts and pay its bills, with a second €170 billion bailout loan following in 2012.

The bailouts were meant to cushion Greece while the crisis passed and they worked to recover their economy and control public spending. It didn’t happen that way. The austerity measures tied to the bailouts pushed an already weak Greek economy into deep depression, shrinking it by more than a quarter, causing unemployment rates to rise above 25% nationally, over 50% for the young. This is as bad a depression for Greece as the 30's were for America. The shrinking economy has lowered tax revenues further than expected making Greece unable to remain solvent without a further bailout. A third bailout has been offered by the Troika but is tied to even more austerity measures and structural reforms that look likely to keep greece in recession or depression for a long time to come.

And that brings us to where we are now. A referendum on whether to accept a third bailout with strings attached or to defy Europe and its creditors.

As I see it, it’s Hobson’s choice for the Greek people: a ‘yes’ vote means a definite period of pain, poverty and economic uncertainty. A ‘no’ vote means a definite period of pain, poverty and political uncertainty. Mum and Dad have finally reached the end of their tether.

There is a third way, which no one will take for political reasons: write down a chunk of the debt, prop up Greece as a federal state and only take payments from trade surpluses. This would allow the Greek economy to recover more quickly, with less pain, and would ultimately lead to an economically and politically stronger Europe. Why won’t anyone do that? They would possibly have to do it for Portugal, Spain and maybe Italy, and it would diminish the political power of France and Germany, particularly Germany, the political and financial powerhouse of the two decade European experiment.

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