Thursday 3 November 2011

Does Greece want to Remain in the Eurozone?

The results of the Cannes G20 meeting are clear this morning. The question of the proposed referendum is whether Greece wants to remain in the Eurozone or not.

European reactions to George Papandreou’s decision were crystal clear. Angela Merkel is quoted as telling journalists that “We would rather achieve a stabilization of the euro with Greece than without Greece, but this goal of stabilizing the euro is more important." Nikola Sarkozy said, in the same press conference that "Our Greek friends must decide whether they want to continue the journey with us." No further European aid will be forthcoming until the decision is made.

The big question, in my mind, is whether this referendum actually takes place or not. Will PASOK MPs obey party discipline and vote for the referendum, when so many of them clearly do not want to? It all depends on roughly 2 votes.

I sincerely doubt this referendum will happen. I wonder then what the reaction will be? Having disrupted political and economic activity for one week, just how much credibility will Greece have left? Or George Papandreou? We already know that the latter is now seen as a liability by a growing number of PASOK MPs. Will they vote him out on Friday, or will they continue his premiership?

It will also be interesting to see the reaction of the Communist Party of Greece. Given that they are against European Union and Eurozone membership, one would expect them to vote for the referendum, in the hopes of having the country return a resounding “no” at the polls. However, they will probably vote against it, another indication of the “flexibility” of political principles.

The debate on the government’s vote of confidence started yesterday in Parliament. The vote, which is separate from the vote on the referendum, will occur on Friday evening. Until recently, I would have anticipated a positive vote for the government by PASOK MPs and a negative vote on the referendum. Now I’m really not certain what will happen.

What is clear is that this adventure has shredded whatever low credibility Greece had in international markets and among its European allies. It fails to solve the core problems affecting Greece’s austerity and growth programmes. It wasted at least one week at present, and if the referendum takes place, it will waste another month in a political campaign with a meaningless result. And the badly-needed sixth installment is also delayed.

Moreover, this political campaign for a referendum solves nothing, for the simple fact that a referendum is insufficient to change voter behavior in areas such as tax or legal compliance, which is what counts. It is now very likely that elections will be held early next year, if not sooner, leading to a further delay.

Unless the referendum vote fails, I now forecast a rising chance of a hard default in December. Given the pace of decision-making until now, it is impossible to see how the sixth and seventh instalments will be released by December and January, in time for approximately EUR 22 bln in bond redemptions in these months. There will also be further slippage in meeting the fiscal adjustment goals.    

It is high time Mr. Papandreou resigned and a more competent manager took his place. By his actions, he has placed the entire stabilisation programme and the future of this country in doubt.

© Philip Ammerman, 2011

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