While the result of Greece’s impending referendum is likely to dictate the country’s political and economic future, the implications for global financial markets and European politics are not so certain. Given that a no vote will almost inevitably lead to Athens defaulting on its debt and a subsequent exit from the Eurozone, surely a return to the drachma signals yet another period of suffering and hardship for the Greeks? Who knows, it could be painful for any number of us in the EU as well.
Wednesday’s poll indicated 57% intend to vote no, the most comprehensive rejection yet, of the austerity measures which have plagued Greece for over half a decade now. And though speculation has regularly suggested Greece is on the brink of financial meltdown, it is now clear that Sunday is D-Day for the Hellenic nation. Given the lead the no voters have over their yes counterparts, it appears the Greeks are either exasperated with their ostensibly perpetual status as economic inferiors or unaware of the imminent storm that default and devaluation could bring. After all, the Argentinian experience illustrates that defaulting on your debt is anything but a pleasant affair. Currency devaluation there led to unemployment doubling to 20% and GDP declining by 11%, all within a matter of twelve months. Since Greek unemployment already stands at 26% and GDP has declined by 25% over the last half decade, the impact of Athens defaulting is almost unthinkable. The reality would almost certainly be mass poverty, increased homelessness and a surge in violence leading to prolonged political and economic turmoil.
Yet if the Greeks accept the terms of the troika’s demands and vote yes in Sunday’s referendum, will the results be any better? The medicine will remain painful, depression will continue with businesses struggling to survive and hospitals battling to remain operative. Given that the funds of local government have already been squeezed and recentralised, there are concerns that public services will be slashed once again. To compound the tragedy, the government’s failure to pay pensions on time last week has led many to believe the money’s now all but run out, given weeks and months of capital flight.
If the yes vote pulls through, there will undoubtedly be implications for Greece’s political leadership. The Greek finance minister, Yanis Varoufakis has been the first to announce he will resign. Given that a yes vote would be seen as a rejection of Syriza’s political judgement, it is widely anticipated that a government of national unity will be convened with or without Tsipras at its head. Though sources in Brussels have suggested a yes result would a shot in the arm for messrs Juncker and Draghi, it may simply be the lesser of two evils for the Greeks. Having said this, it should offer a wake up call to bureaucrats in Brussels that their ill fated European project can only succeed with significant reform. At the moment, all too many of these Eurozone economies are operating at different levels to the German behemoth.
Now we come to the long term repercussions of the referendum. A no would be extensively viewed as the ultimate rejection of Greece’s membership of the single currency and a nod to the Eurozone exit door, earmarking a return to the drachma. Though many people have already considered the impact of a return to the former currency, few have contemplated the prospect of Russian or Chinese intervention in the Greek economy. In this instance, while Greece may recover an element of political sovereignty, their fiscal policy would be cast into the hands of two authoritarian regimes with unknown consequences.
While the projected influence of Russia and China is merely speculation, the margin of victory for either side is certain to be slim on Sunday. With this in mind, the old adage ‘better the devil you know’ may prove increasingly attractive to Greeks in the coming days. If so, the immediate response for the ECB would be to restore the suspended ELA (Emergency Liquidity Assistance), an €89 billion cash fund, offering a free flow of credit to SMEs in Greece. To all intents and purposes, its prior utility was something of a lifeline for Greek businesses given their government’s cash strapped status.
But even if ELA is reinstated, revolutionary change in the Greek financial system is still required. A yes vote on Sunday will require the troika to deliver Athens a set of acceptable offers that help to stimulate growth and productivity in the Greek economy. Despite bailout funds in the region of €240 million, the debt to GDP ratio in Greece has continued to rise since 2010, therefore the IMF, EU and ECB must collectively adopt measures which alleviate the Greek’s plight rather than simply reinforcing the status quo. This may require a revision of the key tenets of the single currency, leading to ever closer fiscal union. In other words for the Euro to function successfully, the ECB may need to take control of members’ taxation and spending plans. Given the resentment that surrounds the reputedly federalist ambitions of the EU, this is unlikely to happen. However if the EU is to succeed, its powers must either be significantly increased or reduced. As it is, Brussels is stuck in a seemingly irresolvable contest between those fighting for a purely economic market and those who want to develop a supranational hegemon.
However the European bout is for another day. For the time being, we can only surmise that a return to the drachma won’t exorcise many of Greece’s financial demons. The black market, which currently stands at 22% of GDP, needs to be tempered, productivity needs to increase and the balance of trade deficit, whereby imports outstrip exports needs to be reduced. Yet for this to be achieved a wholesale restructuring of Greek government and civil society is required. And at the end of the day, actions speak louder than words and it’s not evident that the Greeks have the stomach for the fight.
While it’s unclear whether Greece has the mental fortitude to carry out such acts, we can only wait and see. As such, patience is the key virtue, not only for us watching on, but for those playing out this tragedy in Greece too.