Greek referendum is the last chance for EU to provide real solutions

2011-11-01

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Greek Prime Minister George Papandreou is forcing European elites to face the harsh reality by declaring his willingness to put the new bailout to a referendum. Image Source: GP

Greek Prime Minister George Papandreou announced his willingness to put the new bailout to a referendum, causing complaints and negative reactions across the euro area. The crocodile tears, the expression of irritation, the calls for “reason” coming from various politicians across Europe cannot possibly conceal three fundamental truths: (i) that the much-vaunted Eurozone summit last week, massively failed to produce a ‘comprehensive solution’, (ii) austerty is not working in Greece and will not lead to an exit without any plans for growth – something that is made evident even in the latest report from the troika about Greek debt sustainability, (iii) the crisis is systemic and not a problem of Greece alone.

The referendum is of vital importance for the present and the future of Greece and consequently the eurozone. The Greek people will effectively be called to decide over a new path of draconian and ever-increasing austerity, combined with the drastic reduction of national sovereignty, or to reject the latest plans and venture into uncharted waters, where no one can navigate with certainty.

The key detail in the whole story is found in the systemic nature of the crisis. Had the problem been purely Greek, Greece would have defaulted in May 2010, with minimal costs for all the other member-states of the euro. Instead the problem lies in the entire structure of the euro, in the feedback loops between indebted sovereigns and quasi-bankrupt banks, which are further reinforced by the institutional gaps of the euro architecture.

A Greek default will send shockwaves across the region, bringing down fragile banks, causing a chain reaction that will see desperate states coming to the urgent need of bailing out their own banks to prevent total implosion of their economies. Yet bank recapitalizations will deteriorate national finances effectively producing a new vicious cycle. In the midst of this markets will plunge into unrest, effectively causing interest rates to skyrocket, thus increasing the pressures on challenged states. Anyone willing to contemplate on the series of events that will occur in such a scenario, will realize that the euro will be brought to its natural death.

This is something that everybody knows, including the Greek Prime Minister, hence the decision to put to a referendum the new bail out package that will be finalized within the next two months, is a clear exploitation of this bargaining power Greece has, since it poses the greatest risk to the system.

A possible NO from the Greek people will tear apart the plans European leaders have in their minds. In my view this is the only way to exert pressure on Europeans to change strategy, effectively abandoning their current approach of narrow bail outs to individual countries, coupled with inane austerity, as if the problem was one of national debts (see Stricter rules are good – Stabilizing Mechanisms are much better).

The European leadership must finally find the courage and determination to address the systemic crisis systematically instead of dithering, extending and pretending while praying that some “Good Samaritan” will show up to save the day.

Instead of coming up with a series of ineffective, self-defeating half-measures such as the tower of cards the new EFSF is, or the bank recapitalizations programme that will cause a credit crunch; who all have the fate of dying at birth, policy-makers must finally abandon the dogmas they have clung on to, must stop the power plays that gamble over the fate of the single currency and its people and must finally address the problem as a crisis of the euro, that can only be dealt with system-wide, radical measures. Now is the time to face the harsh reality.