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Politics & Law Series: Expert Comment

The Battle of Greece will soon be over - the Battle of Europe is about to begin

By Dr Sotiris Georganas

by City Press Office (General enquiries)

The Greek government has called a snap referendum to take place on Sunday, asking the Greek people to accept or reject the latest proposal from the IMF and European institutions. According to PM Tsipras, the referendum is supposedly intended to strengthen the Greek government’s position in the negotiations with the institutions.

While the legal and moral status of the referendum is questionable, and the proposal is actually no more on offer, it most probably will happen anyway. Contrary to the actual wording on the ballot, most Greek people (rightly) see this as a vote on Greece’s position within the eurozone and even the EU itself. And as such, they will turn out in great numbers to express their opinion.

A “no” vote could mean exit from eurozone and even EU

If “no” were to win a majority, it could mean the end of the ECB’s Emergency Liquidity Assistance programme that has been keeping Greek banks afloat in the past five months. It would also strengthen government’s intransigence and embolden currents within SYRIZA (currently controlling almost 40 per cent of the party) that find drachma more appealing than a new bail-out agreement.

Even if Mr Tsipras does not personally want Greece to exit the eurozone (a view which, given his recent behaviour, looks ever more implausible), capital flight and lack of support from the ECB and the EU will lead to ever stronger capital controls and eventually a new national currency (let’s call it the drachma).

Given the uncertainty and upheaval associated with the panicky adoption of a new currency, it would be immediately devalued, leading to an unsustainable external debt burden (priced in Euros but repaid in Drachmas). Greece will have to default on its debts to the European partners, which will make it very hard for them to continue supporting a defaulting member through the EU’s structural funds etc. In the best scenario, Greece will have left the EU in all but name.

A “yes” vote does not guarantee an agreement but would help

A positive vote will make it harder for the government to defend its “red lines” in the negotiation, claiming it has no mandate to agree to the terms of the draft agreements seen in the past week. Also, it could lead to the resignation/removal of key players (MinFin Varoufakis has already stated he will quit if the outcome is “yes”) and possibly the whole government. A national unity government could be formed and would then sign an agreement in the next few weeks. Even if SYRIZA does not quit, the acting government would probably be forced to accept some agreement soon.

Current polls do not paint a conclusive picture, but it seems that the “Yes” camp is ahead by several percentage points and is growing stronger as capital controls are in place and the media are flooded with pictures of pensioners waiting in huge queues and supermarket shelves running out of milk.

The upshot is that we seem to be close to an endgame in the Greek drama. All Greek governments up to the current one have been living in the fear of the “anti-memorandum” parties, who were promising magical solutions to the debt problem, wondrous roads to growth, a complete redesign of the European system, an altogether greener and better world. The current government consists of such parties, but despite their five-month-long effort, posturing and threats, it is hard to see paradise in Greece right now.

Even if the “yes” campaign wins, SYRIZA’s gamble has already deeply hurt the Greek economy, which was until December on a path to a robust recovery. Tourism receipts will be lower than expected (and much lower than needed, by an economy that hardly has any other large exporting industry), the banks will be almost completely depleted of funds (and thus unable to finance exporting companies or at least support a weak recovery in construction), the citizens’ confidence in the system evaporated. Greece will have lost another year, in unnecessary economic depression and social upheaval.

The Battle of Greece will soon be over

The only potential upside is that almost all Greek voters (and all Europeans looking at Greece for lessons) will have learned – must have learned – albeit the hard way, not to expect magical solutions: the hyper-negotiators (myopic and nationalistic demagogues in far right and left) have failed.

To paraphrase Churchill, the Battle of Greece will soon be over; the Battle of Europe is about to begin. Now is the time for leaders in Greece and, more importantly, Brussels and Frankfurt, to pick up the pieces and start creating a truly integrated and sustainable eurozone.

Let’s get back to work.

Dr Sotiris Geoganas is a Reader in the Department of Economics at City University London.

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