11 May 2015

Greece: What’s left to do now?


The Eurogroup met today. It was long clear that there would be no deal. Greek government members suggested in advance that unless the Eurogroup statement recognised that there had been significant progress (perhaps allowing the ECB to postpone, a little longer, the point at which it increases the collateral demanded on Emergency Liquidity Assistance loans to the Greek banks), Greece would not pay the IMF payment due on Tuesday. In the end, Greece commenced payment to the IMF long before the formal statement was out.

The major shift of recent days has concerned a Greek referendum. When in late 2011 the then-Prime Minister George Papandreou suggested the Greeks should have a referendum on the Eurozone’s austerity proposals the Germans and French were so dismayed by the prospect that Papandreou was removed and replaced with a former ECB official Lucas Papademos.

By contrast, as German finance minister Wolfgang Schaeuble entered the Eurogroup meeting on Monday he was quoted as saying: “If the Greek government thinks it must hold a referendum, then let it hold a referendum… That might even be a helpful measure for the Greek people to decide whether it is ready to accept what is necessary, or whether it wants something different.”

A referendum now seems very likely, serving two important purposes. From the Eurozone perspective it give them an opportunity to appeal directly to the people of Greece over the heads of their Syriza-led government. The Eurozone will be reluctant to see such irreversible developments as departure from the euro occur only because of difficulties dealing with a particular government (especially one elected by only a minority of voters) when a future government (or the majority of the people of Greece) might want to stay. They will want the opportunity to present their case directly to the Greek people — then if they say no that is their will and choice. Furthermore, most opinion polls suggest that most Greeks still want to stay in the euro. Eurozone leaders will hope to mobilize that pro-euro sentiment to force the Syriza-led government’s hand.

From the Syriza perspective, a referendum is attractive in securing consent for one of two paths it would be politically impossible for it to take without the Greek people’s declared consent. Syriza cannot (and does not want to) give way on the principle that the Eurozone’s austerity programme has failed in Greece and should not continue — let alone be extended into the Third Bailout and Third Memorandum of Understanding setting out the economic structural reforms Greece would need to carry out in order to qualify for its bailout. It could only reverse its position on that if the Greek voters chose it in a referendum. Syriza also (politically) cannot simply take Greece out of the euro without securing political consent. At the General Election Syriza ran on a platform of keeping Greece in the euro and most polls still show overwhelming majority support for that.

A referendum might arise if either the Greek government lost patience or ran out of time and wanted to bring matters to a head, or if the Eurozone gave up on Syriza and tried to tell the Greek people directly what it was offering, with the Greek government feeling politically obliged to test it at a referendum.

Something has to give soon. Those 19 further debt payments, by the end of September, are not going to disappear.

Andrew Lilico is Chairman of Europe Economics.