George Papandreou’s shock referendum announcement has the potential to kill the Euro.
The latest plot turn of the Greek tragedy is the shocking announcement by George Papandreou that his government will hold a referendum on the latest deal, allowing the Greek people finally to have a say in all this. The announcement came only a few days after the landmark deal was agreed which saw half of Greek debt written off and the creation of a fund paid for with borrowing from Chinese (although apparently no-one asked them).
Predictably markets fell dramatically and finance ministers stood shocked at the announcement. Just as progress was being made, suddenly the instability resumed. The referendum would be legally binding, so if the public reject the latest plan, the Greek government couldn’t accept it and not meet its debt obligations. Despite the EU keenly expressing the view that they believe Greece would honour their requirements, a ‘no’ vote would mean Greece defaulting on its debts and major trouble for the Euro and the entire financial system.
The current Greek debt is five times that of Argentina’s in 1998 when it collapsed, and even though the proposed 50% ‘haircut’ is a lot, it’s not enough. A default would stop Greece functioning and ravage its economy, but the true horror is abroad. The major bond holders would drop the Euro bonds, taking vulnerable economies down with them and the Greek situation would be copied in Italy and Spain, which are far too big to be rescued by the ECB or IMF. With worldwide Euro bonds relegated to ‘junk’, countries would have to leave the Euro to survive.
EU officials and national leaders meeting at the G20 have been completely taken aback. The Greek government is relying on the public agreeing with them that the short term pain and austerity is necessary for both the Greek state and the Eurozone as a whole. But the result is not guaranteed if the instant protests that are fast becoming a fixture of Athenian life are anything to go by. The deal would see more assets sold off and none of the hundreds of billions would get through to the average Greek, so Papendreau and he needs to do two things to win this vote; become the best salesman in the world and persuasively explain the dire consequences of a ‘no’ victory, or phrase the referendum in such a way no reasonable person could disagree. The result could not only determine the survival of the Euro- he has a lot riding on this and if he loses will certainly have to resign.
The European leaders shocked (and somewhat arrogant) negative reactions to this news is to not understand the internal politics of Greece. With much of the talent flooding out of the country and protests increasing, the people need to have some involvement. This feeling of helplessness got even worse when foreign civil servants walked in and started to run Greek ministries. It’s difficult for them to get any angrier, but they are. Many in Greece believe a default would be a good thing, as it would bring back monetary control and allow them to devalue their currency.
If ultimately the Euro was killed off, would this be too bad? It would certainly provide fuel for the Eurosceptics and those who call for a retreat from the EU. However there are vibrant and pro-Europe countries which have never wanted anything to do with the Euro. Poland has remained competitive as has Sweden and the Czech Republic. Even debt heavy countries like the UK have the required flexibility to manage its finances and the government has reaffirmed its commitment to Europe.
That takes us to the elephant in the room- Germany. More and more people have realised that the overall value of the Euro has been kept artificially high by the successful German economy (and to a lesser extent France). This has devastated export markets, and in places like Spain, Portugal, Ireland and Greece the benefits of being in the single currency are hugely outweighed by the costs of not being able to devalue their products. If the Euro is to survive, radical solutions need to be found (Germany leave the Euro anyone?)
The Euro’s failings have been painfully exposed and the case needs to be made to let the Euro fail. It would be terrible for banks, but in austerity Europe it can’t get much worse for the citizens. This doesn’t signal the end of the European project at all, but this level of interconnectivity has shown that the EU is too big and varied to have a single currency.