Dicing with debt: Greece's austerity referendum
Greek Prime Minister George Papandreou will use the referendum to try to win a mandate for austerity measures. AAP
Greek Prime Minister George Papandreou has taken the bold step of planning a referendum on the country’s EU-imposed austerity measures, in a bid to claim a mandate for his efforts to avoid a default on government debt.
Greek citizens will vote on whether their government should continue with its bailout deal with the Eurozone, which has resulted in drastic cuts to public spending in return for access to an rescue fund being set up by the monetary union.
If they vote against the measures, then the country will almost certainly be forced to leave the Eurozone and reintroduce the drachma.
Papandreou has been accused of putting his government into crisis with the move, but Melbourne Business School Associate Professor Sam Wylie sees the referendum as crucial step in building consensus around the austerity package.
The Greek Prime Minister has taken a big gamble with his referendum plan – is he likely to win? The Greek Government not a stable political unit, with deep divisions in the country. Prime Minister George Papandreou also governs with a very slim margin – much like Julia Gillard.
His party has only 152 seats out of 300 in parliament. One member of his party has already quit and four others look like they might defect to the opposition.
But the referendum is a bold and intelligent stroke that Papandreou has taken because he is making the issue about whether Greece remains in the Eurozone, and almost by implication, in the European Union.
The problem with this is that he might lose, and that the referendum won’t be held until December or January – so there will be another few months of uncertainty.
But if he holds it and wins, then he really will have a mandate to continue with the austerity measures.
Greeks have protested against the austerity measures. AAP
He is pitching the referendum as a simple question to Greek citizens: do you want to stay in the Eurozone? If you do, then you will need to accept these cuts. If you don’t, then there will be a certain default and we will have to leave the Eurozone in a disorderly fashion. Is there any way for the government to alter the austerity measures to make them more popular? There is no way that the government can sugarcoat the austerity measures. Forward projections of Greek debt indicates it will hit above 200% of GDP unless drastic measures are taken.
There is no way that they can pay back the debt, so they are going to have to accept the austerity measures – and this is what the referendum forces them to do.
The political problem is that the opponents of austerity are able to isolate the pain of the measures from the consequences of not implementing them.
They are able to say that France and Germany are acting in dictatorial way, and that Greece is being victimised, and separate them from the consequences.
The referendum forces people to think about these two issues together – to see the current pain and the future consequences within the same frame.
It will be made very clear to the Greek public that if they vote against the austerity, the country will be forced to leave the Eurozone the very next day. There is no going back.
Any exit from the Eurozone will inevitably be disorderly, so people will need to make the rude calculations to determine which route will be more painful.
The run-up to the referendum may also prove to be quite disorderly.
Imagine that you have your life savings in Greek bank – which way would you vote? You don’t know whether the very next day your savings will be converted from Euros into Drachma.
The sensible thing to do would be to take your money out of the bank.
This means that the referendum itself might precipitate something of a run on the banks, and by extension, a liquidity crisis that the Eurozone will need the manage. Does Greece’s economy have the capacity to overcome this debt crisis in the long term? Greece ultimately needs to liberalise its economy. Much of its economy is currently within the public sector, where it operates outside of the market, and ultimately, inefficiently.
It is also done with a great deal of overt corruption.
The liberalisation of economies in much of the western world in the past 20 years has been about three things: moving big chunks of the economy out of the private sector and into the public sector through privatisation; sweeping away vested interests, by getting rid of particular professions that are closed to outsiders and scrapping importation controls; and then heavily deregulating the economy.
They need to shrink the government, and liberalise the setting of wages and the entry of competition into various swathes of the economy.
This will take massive structural change, but it is necessary change.
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