On Sunday, Greeks will vote in a referendum on whether they want their country to stay inside the euro area and possibly the European Union. To avoid economic calamity and making the past five years a complete waste of time, energy, money and even people, Greeks must vote Yes to the euro and put a definitive end to the Grexit spectre that has cast a shadow over their heads since 2010.
Before getting to the referendum’s implications for Greece, it is important to understand how we got here in the first place. It all began at the end of 2009, when it was discovered that the previous Greek government had run a huge fiscal deficit, which in the end reached 15.7 per cent of gross domestic product, with a public debt of 130 per cent of GDP.
At that point, private sovereign bond investors decided that they were no longer willing to finance such profligacy. In the language of international finance, this was known as a “sudden stop.”
To avoid the (newly elected) Greek government from defaulting on its debt, since it could no longer borrow to repay existing debts, and the likely contagion to Italy, Portugal and possibly Spain that would have followed, the other euro zone member states and the International Monetary Fund offered Greece a first bailout of €110-billion ($153-billion), with a second one in the amount of €164-billion two years later.
In exchange, Athens agreed to undertake significant reforms to its economy (e.g., opening up protected sectors) and public finances (i.e., reducing public spending and increasing tax revenues) in order to create the conditions for a sustainable fiscal policy in the long term.
In the fall of 2014, after almost five years of austerity in which the Greek economy shrank by a quarter, things were finally looking up. Economic growth had returned, even if it was a meagre 0.8 per cent. Unemployment was also decreasing, albeit from very high levels. The budget deficit had, remarkably, been reduced to 1.6 per cent of GDP, and it would have been a surplus if it were not for interest payments on Greece’s very high sovereign debt. The adjustment program undertaken in exchange for the bailouts was working, just like it did in Ireland, Portugal and Spain.
Then, in January, 36 per cent of Greek voters chose a recently created left-wing party by the name of Syriza, led by the young Alexis Tsipras. He campaigned on ending austerity – although without leaving the euro, unlike what had been advocated before.
As a result, Mr. Tsipras and his neophyte colleagues have spent the past five months saying no to every offer that Greece’s main creditors (the other euro zone member states, the European Central Bank and the IMF) put forward, arguing that such offers were too austere.
In the meantime, most of Greece’s reforms were put on hold, and some were even reversed. As a party that was supposed to represent a break with the past, Syriza did not even try to put an end to corruption, tax evasion and special treatment for those close to power. This policy inaction, along with the uncertainty created by the negotiation standoff, caused the Greek economy to fall back into recession and unemployment to resume its upward trend. If Mr. Tsipras and Syriza wanted to put an end to austerity, they have failed.
In light of his inability to get Greece’s creditors to give up their reform conditions in exchange for further bailout money (close to €20-billion), Mr. Tsipras decided unexpectedly less than a week ago to call a referendum on those same conditions, effectively asking Greeks if they want their country to keep the euro.
If the Greeks vote Yes on Sunday, Mr. Tsipras and his Syriza colleagues will have to quit, since they support a No vote. Otherwise, they will have no legitimacy, let alone any credibility, to negotiate effectively with creditors and undertake the necessary reforms to the economy and public finances. A new unity government formed by opposition parties would likely take its place in order to bring the Greek economy back from the edge of the abyss. In other words, the country would be back to where it was about a year ago.
If Greeks vote No, then Syriza stays in power and the Greek economy falls into the abyss. The European Central Bank will no longer be able to provide emergency financing to Greek banks, forcing the latter to collapse. Without a properly functioning banking and financial system, the economy will enter a depression, with IOUs and barter the only means of doing business until the Greek government introduces a new currency, which is not something that can be done overnight. More unemployment and poverty will ensue. Again, Mr. Tsipras and Syriza would achieve the exact opposite of what they claim to want for the Greek people. A Grexit won’t even solve any of Greece’s structural problems, such as corruption, tax evasion, public administration inefficiency and unproductive economic sectors.
If the opinion polls of recent days are to be believed, it appears that Greeks understand that a better future lies with the euro and Europe. One hopes so. Otherwise, the past five years will have been for nothing – and so will the next five years.