David Attewell: Putting the Greek Referendum in Context

(Once again, we turn to my brother for some expert analysis on the state of play on Greece)

The Greek crisis has been through at least ten iterations at this point. Time and time again, negotiations have deadlocked and the media has reached a fever pitch as a supposedly decisive deadline approaches. Yet every time, we get a classic EU fudge: nobody leaves happy, all the fundamental problems remain unresolved, but the can is kicked just far enough to avert a real blow-up.

With Europe on edge over a Greek referendum being cast as a choice between the Euro and the drachma, this time looks different.

How We Got Here

Five months ago, the deal reached between the Syriza-led government and the Troika boiled down to this: the creditors could fix broad objectives, from tight fiscal policy to privatizations, but the Greek government would have the margin for maneuver to choose the policy mix with which to achieve these goals. Obviously this was a major climb-down for a party whose political purpose was opposing austerity. But lacking leverage, the Tsipras government took this medium-term deal in the hopes that it could at least consolidate its political support by making austerity less regressive and structural reforms less transparently plutocratic.

What we’ve just seen is this uneasy truce being shattered by the creditors. With a slow-motion bank run taking place in Greece, the creditors took the chance to take the hardest of lines in the most recent negotiations. And Syriza essentially folded. Their most recent proposals acceded to a severely intensified austerity, with no commitment by creditors to debt relief. The only caveat demanded was that the lowest pensions would not be cut and that the tax burden would be increased in a not-entirely-regressive manner: a mix of heavy VAT increases (with carve-outs for medicine, food, and electricity) and taxes on the middle class and corporations.

The government’s proposal for austerity with a human face was already a huge stretch: denounced by Syriza’s left and by angry pensioners in the streets, it would very likely have led to the party’s split. But even this plan was rejected by the IMF, who, without a hint of irony, suggested that taxes on business profits would be recessionary, and that the vast majority of the package should thus be spending cuts, rather than taxes.

It’s difficult to escape the conclusion that the creditors’ latest proposals were about regime change more than economics. The creditors had won a total victory, but were unsatisfied with a solution which didn’t eliminate even the fig-leaf with which the Syriza-led government would defend its political credibility. The last fragile pretense of sovereignty was repudiated: not only would its creditors set the objectives of Greek policy, but they would decide in detail the policies themselves. This was a bridge too far, and Tsipras pulled out of negotiations suddenly and declared a referendum on the Troika’s latest proposals, set for Sunday.

Europe’s referendum allergy

If there’s one thing EU elites hate, it’s a referendum. Historically, they’ve had a nasty habit of losing them, as when the Dutch and French rejected the European Constitution in 2004, or when Ireland rejected the Lisbon Treaty in 2008, forcing a re-run.

But if they hate referenda in normal times, they go berserk when referenda are proposed under crisis conditions. Even when Greece’s Social Democratic PM George Papandreou proposed a referendum in 2011 in order to rally popular support for austerity measures, the Troika flatly ordered the referendum be cancelled if the country to stay in the Euro, ultimately leading to a rebellion which unseated Papandreou in favor of a preferred technocratic caretaker government.

The EU’s Furious Response

The response to Tsipras’ referendum declaration has been a breathtaking shock-and-awe campaign. European leaders have lined up to warn that the referendum is not a yes-or-no on an austerity package, but on the country’s euro (and likely EU) membership. When these threats turned Greece’s bank run from a slow-motion trickle to a full-on scramble for the exits, the European Central Bank (ECB) deliberately refused to increase its liquidity support, forcing the country to apply capital controls. As stopping bank runs is the ECB’s primary job, this was the rough equivalent of the Fed letting Louisiana’s banks collapse because they want to get rid of Bobby Jindal.

The breadth and vehemence of the center-right to Syriza is unsurprising; Merkel is defending the architecture of her entire European policy, while many former-Soviet bloc Eurozone members (e.g Estonia, Latvia) lack viable center-left parties and hate anyone even vaguely associated with socialism; they are also poorer than Greece and resent contributing to its bailouts. Spain is headed by a vulnerable center-right government facing a serious challenge from the populist-left Podemos party.

But what stands out particularly has been the hostility of the center-left. François Hollande (“I refuse to condemn Europe to austerity without end”), Sigmar Gabriel (“Time to break the downward spiral of austerity”), and Matteo Renzi (scolder of the “high priests of austerity”) have each taken turns threatening the Greeks with ejection from the Eurozone if they vote no to austerity. For his part, Martin Schulz, the Social Democratic President of the European Parliament has called for Syriza to be unseated and replaced with a technocratic government. This shows that the European center-left is fully committed to an accommodation with the center-right: France and Italy’s deficit targets will not be strictly enforced as long they support punitive austerity in the periphery, and neoliberal structural reform at home. To save themselves, they are banking heavily on an EU-level stimulus package that even The Economist thinks is “laughably inadequate”, quantitative easing, and the TTIP.

The Referendum Itself

Paradoxically, the referendum is both hugely important and will change little. It is important because if the Greek people vote Yes to the austerity package, then the government will collapse, dealing a major blow to the anti-austerity movement across Europe. A message will have been sent loud and clear that pro-EU democratic opposition to austerity cannot work; as Greek Finance Yanis Varoufakis has mentioned, the worrying implication is that the Neo-Nazis (and right wing populists more generally) will become the official opposition. By contrast, a No would certainly demonstrate the depth of antipathy towards the austerity and highlight that the creditors’ demands cannot be passed through the Greek parliament.

On the other hand, the referendum result will change little in the sense that a Yes vote will not resolve Greece’s economic depression or Northern Europe’s growing discontent with providing bailouts. The IMF’s recent report shows that even under absurdly optimistic growth projections, Greece’s debt will remain unsustainable. (Of course even this conclusion and its own staff research showing that austerity depresses growth and that liberalizing structural reforms don’t boost growth do little to deter the IMF’s leadership from proposing as an elixir for Greece—you guessed it, austerity and structural reform.)

At the same time, a ‘No’ vote is unlikely to yield any concessions for the Syriza government. The Germans have implied that they will not deal with Syriza regardless of the outcome (German public opinion has hardened to an amazing extent). And without an injection of liquidity from the ECB, Greek banks will run empty in days, not weeks. The government might be brought down anyway, or be forced to print the drachma under the most chaotic circumstances (contrary to much of the red-baiting press, this is the last thing Syriza’s leadership wants).

Polls are currently on a knife’s edge, and swelling Yes (Nai) and No (Oxi) rallies have shown the extent to which Greek society is bitterly divided. But if No carries major risks, Yes is a guarantee of a slow death for the Greek economy, and an admission that European democracies can be bullied into submission by their own “apolitical” central bank.

It’s worth remembering again that the creditors had a victory in their hands just two weeks ago. They must be extremely confident to gamble that they will either win the referendum or that Grexit will have little impact. That kind of confidence has some bad historical analogues. And on that note, I leave you with the eerily prescient quote from Keynes, courtesy of Oleg Komlik:

“The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.”