On June 26, Alexis Tsipras, the prime minister of Greece and leader of the Coalition of the Radical Left (Syriza), took everyone by surprise by calling a snap referendum to be held about a week later, on July 5. He declared that the terms offered by the country’s lenders (the International Monetary Fund, the European Central Bank and the 18 other state members of the euro zone) to disburse the last tranche of the country’s bailout program were unacceptable. However, instead of plainly rejecting them, he called on the Greek people to decide. With a borderline surreal ballot referring to highly technical reports of fiscal agreements (with titles in English) and with borderline irregularities (the option to reject by saying “no” was placed above the approving “yes”), the Greek electorate was called to decide on a momentous question without any real space for deliberation.
Why is this referendum momentous? Because, by calling off the five-month-long negotiations with its creditors, the Greek government entered into a state of default. During the past month, as negotiations appeared to be hitting various obstacles, a gradual bank run took place with billions of euro leaving the Greek banks; the banks were kept alive only by a continuous infusion of funds from the ECB (the emergency liquidity assistance, or ELA). As soon, however, as the Greek government left the negotiating table, the ECB stopped supplying the Greek banks with funds, forcing the government to imposed a bank holiday and capital controls. The result of this decision was economic paralysis, as imports and exports came to a standstill, while tourism, Greece’s cash cow, began feeling the effects. The images of long lines forming at ATM machines and of pensioners lining up to collect parts of their pensions under a scorching sun were shocking, but apparently not shocking enough to cause the government to alter its course. Instead, after a highly confusing week of rumors about some last-minute deal being hatched, it became clear that the snap referendum was like a badly defused bomb that had to explode.
The government framed the referendum as a choice between approving and rejecting austerity. Clearly, no one likes austerity, least of all the Greeks, who have spent five years taking this bitter medicine. But what would come out of a rejection? A better deal? Unlikely. A democratic mandate against austerity by one euro-zone member state has to be balanced against the democratic mandates of 18 other euro-zone members against disbursing additional aid with effectively no conditions. It looks more likely that the euro zone will give Greece the cold shoulder, especially since the markets reacted to Greece’s IMF default with indifference. If that is the case and no deal materializes, Greek banks will quickly run out of cash. The hard deadline appears to be July 20, when Greece’s ECB loan installment comes due; if Greece defaults, the ECB can no longer support Greek banks. Eventually the government will need to print IOUs to pay salaries and pensions, before being forced to print its own currency. The process will be very difficult to reverse, so much so that some commentators have spoken of a Greek government plan to effectively take Greece out of the euro zone. Is there a chance of Greece’s creditors caving in? Unlikely, given that this would be seen as successful blackmail by the Greeks, opening the door to all kinds of future potential challenges against the euro.
If the “yes” option wins on the other hand, it is possible that a unity government might emerge in Greece and negotiate a better deal. The details are complicated both on the domestic front (this would require a split within Syriza) and the European/international front (where 18 parliaments must approve a new deal). All this would take place against a backdrop of quickly deteriorating conditions in the Greek economy, making a new bailout even more expensive.
If all else fails, Greece is likely to be forced to exit the euro zone under the mantle of a government that has polarized society and that uses a mixture of nationalism and radicalism that is reminiscent of both Milosevic and Chávez. Economic chaos will quickly give way to mass pauperization as the new drachma will lose most of its value. Greece, a country that imports food, energy, and medications, will probably be hit very hard. When the situation stabilizes, it is likely to stabilize at a much lower level.
And so it was that a country that had achieved a primary surplus in 2014 defaulted in 2015. The same country, having undergone a painful five-year internal devaluation is now faced with the prospect of a currency devaluation, by leaving the euro. This is an incredible economic, social and political mess, and the blame game will be monumental. It is impossible to project what the potential fallout might be.
Read more about Greece and the euro at the Monkey Cage:
Amber Curtis, Joseph Jupille and David Leblang: Greece isn’t the first country to have a debt referendum. Does Iceland provide useful lessons?
Nikitas Konstantinidis: Has Greece always wanted Grexit?
Melissa Schwartzberg: What ancient Athens can and can’t teach us about the Greek referendum
Manuela Moschella: Rescuing Greece means rescuing Europe too