27 June 2015

Grexit: does a referendum make it inevitable?


The Greek government has called a referendum, due to be held on July 5th. The announced intention is that the question should be whether or not the Greeks should accept the final offer from Greece’s government creditors on the conditions for receiving more loans and continued support for the Greek banks.

This gives rise to a range of questions.

1) Is this is in practice a referendum on whether or not Greece should leave the euro? If Greeks said no but did not want to leave the euro, how would that work?

2) The offer from the creditors was supposed to apply from July 1st and needed to be voted on in advance by Eurozone parliaments. It has been withdrawn this morning (Saturday). Indeed, even if the Greeks had not called a referendum it is far from certain that all Eurozone governments would have supported it – the Germans and Finns are believed to have regarded it as too soft. If Greeks say yes, will the creditors agree to reactivate the offer? If they don’t does that mean Grexit either way?

3) Can the Greek government get as far as the referendum, politically and constitutionally? The Greek referendum rules explicitly forbid referendum on fiscal issues – is this referendum constitutional? The Greek president has threatened to resign if the government attempted to exit the euro. Might the attempt to hold this referendum be interpreted in that way? If the president does resign mid-referendum campaign, what happens then?

4) How will the Greek opposition recommend Greeks vote and how united will it be? Only the pro-euro centrist To Potami party had indicated the Greek government should accept any previous deal. The centre-right New Democracy leader has today said Greeks should vote in favour of the creditors’ deal, but there is unlikely to be unity amongst other New Democracy MPs on that point.

5) Can the Greek economy and society last until the referendum? The ECB seems unlikely to continue to support the Greek banks after the current bailout programme expires on July 1st. It might pull the plug as early as tomorrow. There were claims of queues to withdraw euros from ATMs. There will be capital controls for much of the week and probably at least a couple of bank holidays. Will Greeks accept this in good spirit or could there be desperation and riots? Could that force Grexit even before the referendum?

I have found the press narrative on this, debating details of pension rules and VAT, rather bizarre. On the core issues there has been no movement at any point and how could there be?

The core issues concern democracy, debt and the feasibility of the debt being repaid. Syriza was elected promising to restore Greek sovereign control over its economic affairs. To do that they needed to have no more “memoranda” specifying how their economy would be run. To get there they needed to have some of their debts forgiven, as otherwise they would continue to need to borrow more for the indefinite future and each new loan would need another memorandum. The Greek government thought that other governments were bound to accept that these debts could not be repaid.

The Eurozone, on the other hand, has never accepted that Greece’s debts must be forgiven. That’s partly for legal reasons and partly because of their own voters’ demands (only around 12% of German CDU voters support debt forgiveness). But it is also because they don’t want to let the Greeks manage their own economy whilst they remain in the euro – they don’t trust them not to destabilise things again. They don’t want other countries that were lent money or placed under economic reform programmes to take the precedent of Greek debt forgiveness and ask for it themselves. And they don’t agree that the Greeks simply can’t pay. At something like 4.5% of GDP each year the demands upon Greece are a lot, but much less than Italy and Belgium managed successfully to battle through in the 1990s.

The joker in the pack here is the IMF, which appears to have long since regretted being involved at all. I think the IMF has for some time believed Grexit is the answer and has been trying to “help” the other parties to come to that conclusion.

How will Greeks vote, if we do indeed get as far as the referendum? Polls suggest they love the euro even more than they hate austerity. But they also love Alexis Tsipras, who is proving a very effective demagogue. I wouldn’t bet against him securing what he wants, which is clearly Grexit.

We aren’t there yet. Grexit is still not inevitable. But the end of the long-running Greek drama – at least in its current form – is nigh.

Andrew Lilico is Chairman at Europe Economics