George Papendreou’s decision to hold a Greek referendum on the euro bailout package earlier this week looked, at first site, like a political masterstroke. Tasked with imposing austerity, he sought the backing of the Greek people for the plan laid out by European Union leaders the week before. No doubt he had calculated the potential consequences. If successful in securing public support, he would have neutralised the street protests against the measures. If defeated, he would avoid the task of imposing something against the will of the people. What is clear now is that he had not bargained for the reaction that his decision has had among other EU leaders.
As today’s The Economist outlines, Papandreou has been condemned by European leaders – who see his actions as a wrecking ball against the negotiations which took place last week. The markets were evidently spooked by the surprise announcement, as were the Greek people when the stark conclusion of Angela Merkel and Nickolas Sarkozy was laid out to them: the referendum will probably determine Greece’s euro, and maybe even EU membership.
Contrary to what people here might think, most of the Greek public do not want the country to leave the euro. In fact, 70% of public opinion is in favour of continued membership. And with many public servants who would prefer their benefits to continue to be denominated in euros, it is therefore not clear that the Greeks would have automatically rejected the package.
Nevertheless it looks like they now will not get the chance to vote. This is a dangerous situation. Opponents to the package and the subsequent austerity will be heightened with a sense of injustice – and even with the 50% write-down in Greek government debt, the stock will still be around 120% of GDP by 2020. Greece therefore finds itself in a terrible situation. The two long-term options suggested both look distinctly undesirable. They could leave the euro, which in the short-term is likely to lead to a huge devaluation and a massive destabilising effect, as well as a hasty exit from the EU. Or they can remain in, unable to restore competitiveness without huge structural changes and austerity packages which are likely to lead to huge protests and internal disruption.
Given these stark choices, I am of the opinion that the Greek people should have a say. But clearly there are huge consequences for other EU states of a full Greek default, and it is therefore perfectly understandable for EU leaders to look out for their own national interests.
As I’ve mentioned before, any solutions in the medium term are a sticking plaster for the underlying faults of the single currency – the most important of which is the disparity in competitiveness between the north and south of the Eurozone countries. Full fiscal union of the countries is certainly an option, but it is clear that this would lock-in substantial transfer payments from north to south, which are likely to prove unacceptable to the taxpayers of the northern states. Likewise, making the ECB a lender of last resort to buy different government bonds is likely to be resisted by German aversion to potential inflation.
In an ideal world we would need a solution that allowed some competitive devaluation for Greece whilst not radically undermining stability, and which would not require full fiscal integration. One means that had been talked about before to achieve this is the potential for two different euro currency blocs. Evidently dependent on the composite members, this would likely enable a smaller devaluation to enable a boost to competitiveness for the Southern states whilst avoiding the need for a huge fiscal integration process.
More thought would be required in to precisely how losses would be dealt with, but given the severity of events, it looks like an option that requires urgent consideration. I don’t pretend to be an expert on currency zone break-ups – so any thoughts you have on this or the other options are extremely welcome.