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A Greek Referendum Probably Won’t Help; but it Could

At the end of last week, it seemed that the biggest news on the Eurozone debt crisis would be the backslide in markets following initial positive reactions to the agreement that came out of last Thursday’s summit. However, Greek Prime Minister George Papandreou put paid to that assumption by announcing plans to hold a referendum on the agreement, so that the Greek people could have their say over whether to implement it. Papandreou’s counterparts across the Eurozone and EU seemed genuinely stunned by this news, though German Chancellor Angela Merkel and French President Nicolas Sarkozy reacted promptly by summoning Papandreou to Cannes for emergency talks.

The response in Greece has been to call variously for the Prime Minister to step down, call a snap election and for a government of national unity to push through necessary reforms before taking the country to elections. A confidence vote to be held on Friday is currently being debated in parliament, though Mr. Papandreou was not even present for the first of three days of debate over the motion, having headed to Cannes on Wednesday for the aforementioned talks with Merkel and Sarkozy. This is somewhat symbolic of the entire process of the Greek debt crisis, with Papandreou pulled in opposite directions – aiming to satisfy international creditors even when this clashes directly with domestic goings on. Such is the nature of a situation where a sovereign state has lost the ability to service its debt and requires outside help, which always comes with strings attached.

There is an inevitable tension between the demands of outsiders that feel justified expecting certain things in exchange for their help, and the demands of citizens who do not wish to suffer at the hands of foreign authority. As is often the case in these difficult situations, both parties are somewhat right and it does not really matter. Unfortunately for the Greek people, the outcome of this referendum is not going to change the fact that the Greek economy has a long road to recovery and the only route involves painful austerity for at least the next two years, if not longer. The most dramatic impact this referendum can have is probably along the lines of making the situation much worse, in terms of Greece going through a disorderly default, readopting a massively devalued drachma and contagion spreading to the likes of Portugal, Ireland, Spain and Italy. Given this scenario, it is easy to understand widespread opposition to the idea of a referendum.

However, were the Greek people to vote in favor of implementing fully the agreement reached at last week’s European Council summit, this would add a great deal of legitimacy to the Prime Minister’s actions so far and going forward. Further to that, the striking civil servants who have caused public sector paralysis, compounding an already dire budgetary situation, would surely see their support base narrowed if their actions are shown to run contrary to the will of the majority. One might rightly ask why strikes have so far been met with general acceptance if in fact the majority of Greek people favor getting on with painful but necessary reforms, and therein lies the possible benefit of a referendum. Specifically, in putting it to a vote, Papandreou has asked the Greeks to put their cards on the table and demonstrate once and for all whether they are resisting something they realize is ultimately inevitable, or whether they would genuinely prefer a different course that does not necessarily involve the euro. If the former turns out to be true, then this bold move by the Greek Prime Minister may increase the likelihood of effective reforms.

Along the same lines, it becomes tiresome to hear politicians in creditor countries make bold claims about what they are prepared to do if Greece does not implement reforms more quickly, more efficiently, more decisively, etc. To the extent that those same politicians oppose a referendum that could let them off the hook for any more Greek bailouts, then the truth will turn out to be that they already knew the alternative to bailing out Greece was too terrible to consider. Holding this referendum is a great risk and, assuming it goes forward, its results could have calamitous consequences in and well beyond Greece. To the extent that it forces both the Greek people and those in creditor states to acknowledge that they would rather proceed with the much maligned approach undertaken so far than with any other of the unattractive options on offer, things might proceed more smoothly in future. For now, though, it is unclear whether either side really wants this question answered.

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