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Greece's bizarre referendum

Greece's bizarre referendum
Published 29 Jun 2015   Follow Tris_Sainsbury

For those who missed the press coverage over the weekend, the Greek Government has scheduled a referendum for Sunday (5 July), with the Greek population being asked a bizarre question: will they accept the latest creditor proposal, of 25 June, which details the terms of an extension of the Greek bailout package?

Why bizarre? Greece needs to repay a €1.6 billion loan to the International Monetary Fund by Tuesday (30 June), and the bailout package Greece is meant to receive from the Eurogroup will expire on 30 June. So by referendum day, the conditions underpinning the terms the Eurogroup extended for its package will have fundamentally changed. In short, the referendum will be based on a meaningless and out-of-date question.

If Greece does miss its payment, the IMF board will probably enact its normal process for dealing with payments in arrears. This does not necessarily represent a technical default in the eyes of credit agencies, but Greece will find it harder to negotiate with creditors.

In the face of an intensifying bank run, the Greek Government has had to close its stock market, declare a bank holiday and impose severe capital controls (a maximum of €60 can be withdrawn from an account in one day and overseas transfers of cash are prohibited, aside from vital pre-approved commercial transactions). These developments will likely result in economic conditions in Greece deteriorating quickly in the coming week. [fold]

The broader international effects of these developments remain unclear.

The risk of contagion certainly looks lower than in the European crisis of 2010, not least due to the creation of European rescue facilities, the presence of quantitative easing, statements from the ECB, and the fact that Greek money is owed primarily to official creditors rather than the private sector. However, the question of whether the international community is able to escape all of the short-term pain, and whether it has identified all of the channels of risk, is likely to be tested in the coming days.

It also remains unclear what the next steps will be in the event of either a 'yes' or a 'no' vote. The best that can be surmised is that a 'no' makes the case for a Grexit that much stronger. In contrast, a 'yes' vote would suggest that a new negotiating team would be needed, given the ruling Syriza Party is actively opposing a 'yes' vote and does not want to return to the European negotiating table.

The long term perspective is that we are witnessing an at-times painful series of negotiations that all contribute to the grand bargain of the European project. In this view, we are simply in a particularly dramatic stage of a complex negotiation path that has already delivered political, monetary and banking union and which will, at some point, result in fiscal union. The Greece case shows that the participation of countries in the project only works up until the point where their populations (and the parliaments they elect) are willing to tolerate the arrangements they are asked to bear. 

Granted, the Greek Government has not handled the negotiations well. But the Eurogroup's truly remarkable list of conditions cover the entire economic policymaking gamut from VAT reform, fiscal structural amendments, pension reform, tax reform, the financial sector, labour markets and competition reforms. The tough-love approach by the troika (the European Commission, IMF and ECB) invites comparisons with the disastrous programs such as the German reparation payments after World War I and the 1998 IMF program for Indonesia, and raises questions about whether the international community is learning from past mistakes.

As the former British cabinet minister Alan Milburn said at the end of the ABC's powerful The Killing Season, 'No one can escape blame for this'.

Photo by Flickr user Duncan Hull.

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