A Greek Bearing Gifts

Written on November 7, 2011 by Ángeles Figueroa-Alcorta in Culture & Society, Europe, Globalization & International Trade, Political Economy

George Papandreou chose the wrong time to call for a referendum

“Does Greece want to remain part of the euro zone, yes or no?” That was the blunt, existential question European leaders put to the Greek prime minister, George Papandreou, when they summoned him to an emergency dinner in Cannes on the eve of the G20 summit to explain his unexpected call for a referendum on the latest deal to salvage the euro. And that is the question they wanted the Greek people to vote on in the hope that the answer might be yes. But that referendum may never take place. As The Economist went to press, the prime minister’s position seemed untenable, putting the vote into doubt. Much, it must be said, to the relief of some European leaders.

Greece does not have much time. Nicolas Sarkozy, the French president, said it would not receive “a single cent” until it had cleared up the uncertainty. Barely a week after their “comprehensive” solution to the euro’s crisis, European leaders must openly consider a chaotic Greek default, and its departure from the euro.

Finance ministers are rushing to erect the €1 trillion ($1.4 trillion) firewall that the euro zone had designed at its last summit. But with markets already in panic, it may not be strong enough. Only the European Central Bank (ECB) can put up the “wall of money” that, in the words of Ireland’s finance minister, Michael Noonan, is needed to protect vulnerable but solvent big debtors like Spain and Italy. Senior officials hope the ECB’s new president, Mario Draghi, will “do what is necessary to ensure that we will still have a euro”. But nobody can be sure.

No wonder markets are panicking, and no wonder European leaders are furious. “Papandreou is an idiot,” says one senior official. The Greek prime minister did not tell anyone, even his own finance minister, that he was about to gamble Greece, and the euro, on a referendum. His action smacked of ingratitude. The deal was the best yet offered to Greece: writing off half its debt to private creditors, with €130 billion of cheap loans to keep the country going. The Greek move threatened to wreck the euro zone’s painstakingly negotiated big solution. To add insult to injury, it ruined Mr Sarkozy’s hopes for the G20 summit on November 3rd-4th, which was his chance to take the world stage ahead of his re-election campaign next year. But most dramatic of all, the move backfired on the prime minister himself. His finance minister, Evangelos Venizelos, who attended the grim dinner in Cannes, returned to Athens to declare defiantly that Greece’s membership of the euro was an historic achievement that “cannot depend on a referendum”. Mr Papandreou’s last gamble may have hastened his demise.

In truth, the euro zone’s rescue was coming unstuck even before Mr Papandreou’s blow. The details of the second Greek bail-out were left vague and, even if boosted, the euro’s rescue fund was still inadequate. After a brief rally, the markets soon started worrying about Italy. Despite cobbling together a plan for growth and to bring down Italy’s vast debt, government-bond yields have risen to dangerously high levels.

This new phase of the euro crisis shows, once again, how the underlying causes are political as much as economic. Doubts persist about the ability of the burlesque Silvio Berlusconi to carry out real reforms. Resistance from creditor countries, mainly Germany, constrains the rescue fund and the ECB. Popular anger in debtor countries, notably Greece, is testing the limits of austerity.

The Greek population is at the point of revolt; the bureaucracy is refusing to modernise; the ruling Pasok party is scheming against its leaders; and the opposition New Democracy party is refusing to support vital reforms. So, Mr Papandreou must have wondered, why not turn to the people for support? Yet the EU has a deep fear of referendums. Voters in Denmark rejected the Maastricht treaty in 1992, those in France and the Netherlands threw out the draft constitution in 2005; the Irish temporarily blocked the Lisbon treaty in 2008. Eurosceptical British Tories want a referendum to force a renegotiation of Britain’s membership or perhaps get out altogether. Read more…

As published in www.economist.com on November 5, 2011 (from The Economist Print Edition)


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