The referendum on whether Greece should accept the Eurogroup’s most recent proposal for extending the bailout package, to be held on Sunday 5th July, represents an opportunity to avert Grexit. The IMF and euro zone policy makers were wrong to dismiss it as too late and therefore irrelevant. A ‘yes’ vote on Sunday could substantially change the negotiating climate if it triggers fresh elections in Greece which deliver a genuinely reform-minded government.The ECB’s decision to stop supplying Greece with euros has triggered capital controls in Greece
Hording of euros will make them scarce, hastening the need for a new currency
But Brexit can be avoided. Few want it to happen, and deadlines are imaginary constructs.
IMF and Eurogroup are wrong to dismiss the Greek government’s decision to hold a referendum this Sunday.
A ‘yes’ vote on Sunday could substantially change the atmosphere and lead to a positive outcome, if the IMF and Eurogroup are receptive.
The Eurogroup must offer debt relief in exchange for broad structural reforms.
I continue to believe that Greece will remain in the euro. It is what the Greeks want, by a large majority according public opinion polls, it is what the euro zone policy makers want (including, importantly, Angela Merkel), and it what the US wants for geo-political reasons.
However, with the ECB announcing yesterday that it will no longer allow the Greek central bank to print euros, and the consequent introduction of capital controls by the Greek government, Greece is undoubtedly moving steadily and unhappily towards the exit door of the euro.
Greeks are now hording euros, starving banks of the currency. This means that the central bank may need to print its own currency in order to ensure pensions and public sector salaries are paid. Initially launched at parity with the euro, it will fall sharply in value due to the reluctance of Greeks to hold it any longer than need be.
This is in accordance with Gresham’s law, which predicts that bad money drives out good money, as households use good money as a store of value rather than as a transaction currency.
How do policy makers put this inching towards a Grexit into reverse?
The Greek government has announced a referendum on Sunday 5th July, on whether the country should accept the deal offered last week by euro zone finance ministers at the Eurogroup discussions.
This is a potential game changer, which the Eurogroup and the IMF should welcome.
Sadly they both rejected it on the spurious grounds that its too late: the IMF wants to repaid EUR 1.5bn by the end of tomorrow, which is the same day that the euro zone second bailout expires, with no agreement in place as to what will replace it.
But deadlines are imaginary constructs. The IMF and Eurogroup should wait a week and see what result the referendum brings. If a vote to reject the Eurogroup’s final offer comes to pass, then Grexit should be allowed to happen.
Syriza will then have a free hand to build the socialist utopia it wants, without interference from Brussels, Frankfurt or Washington. Since the pressure for fundamental economic reform will be reduced, there is little chance of the country’s economy and politics changing in any meaningful way. Elections will continue to see one interest group swapping places with another, with clientelism and corruption being key characteristics.
However, a vote to accept the Eurogroup proposals will be a game changer. Sriza would have to call elections, since it could not implement reforms that it has already rejected and will be campaigning against in the referendum.
A new government that reflects the will of the people could then sign on the dotted line. The risk of Grexit subsides, Greece remains in the euro and the EU and the continent breathes a sigh of relief.
Austerity will persist for years as the country pays off its massive debt. However, this could be alleviated by the Eurogroup should agreeing to substantial debt relief as and when reforms to labour markets, pensions, tax collection and the breaking up of professional cartels take place.
What will emerge will be a modern European country.
The unwillingness of the IMF and the Eurogroup to discuss debt relief is a blind spot that needs to be addressed. Repayment of debt to GDP of around 185% is unrealistic, better to reduce the debt in return for a broader set of reforms than to face default on all the debt and see no reform in a Greece outside the euro.