Greeks, citing national pride and sovereignty, voted overwhelmingly Sunday to reject a package of tax increases, government layoffs, and pension reductions demanded by wealthier eurozone nations in exchange for a new financial lifeline for the bankrupt country.
The vote, which was running at 61.7 percent against with 82 percent of the precincts reporting, amounts to a stunning political victory for Prime Minister Alexis Tsipras.
Mr. Tsipras' left-wing Syriza party rolled to victory in January elections, thanks to an electorate furious at five years of austerity measures that have slashed economic output and employment, and came with promises of a new way of doing business with the rest of Europe. Six months of negotiations failed to yield easier terms from the European Central Bank and the IMF, and with the government out of cash he returned to the voters again, and again appears to have won a resounding mandate.
But while his victory is being painted as a win for national sovereignty over the demands from bureaucrats at the ECB and from EU financial heavyweights like Germany, it doesn't provide a way out from Greece's debt trap.
Greek banks have been shuttered for a week since the ECB shut off emergency funds and will likely remain so, with only an estimated €1 billion of cash on hand in a country of 11 million people. The government will soon have to make payroll for approximately 500,000 but doesn't have the means; IOUs will probably be issued instead. It's frozen out of private credit markets and the country is already technically in default on a $1.8 billion loan from the IMF. A return of the drachma is no longer out of the question. "If they say ‘no’ they will have to introduce another currency after the referendum because the euro is not available as a means of payment," European Parliament head Martin Schultz told a German radio station.
Greek unemployment is about 25 percent (youth unemployment is more like 50 percent) and since 2008, gross domestic product has declined by one fourth. Greece's decline since 2008 has been longer than America's Great Depression, which started to turn around in its fourth year.
Tsipras and his Finance Minister Yanis Varoufakis are hoping that a political mandate at home will amount to greater political leverage in the rest of Europe, which is worried about the ripple effects of a Greek default on other southern economies and the possible first exit from the currency union formed in 1998.
"In 24h we COULD have an agreement", I said. But our toxic media rushed to report that I predicted an agreement within 24h. Go figure!— Yanis Varoufakis (@yanisvaroufakis) July 5, 2015
That "could" looks like a very big one. Germany and the ECB have shown no signs of budging, and the rhetoric is heated and ugly on both sides. Though today Varoufakis is speaking of possible deals and his European partners, he didn't exactly set an outreaching tone in comments to Greek newspaper Kathimerini, published yesterday. "Why did they force us to close the banks? To instill fear in people. And spreading fear is called terrorism," he said, urging a "no" vote. "The EU will have no legal grounds to throw Greece out of the euro, and then the real negotiation will start with creditors."
Varoufakis also vowed that the banks would reopen this week, but short of Germany and the ECB effectively falling on their swords, it's hard to figure out how that could possibly work.
Greek frustration is understandable. The IMF and the EU have participated in two bailouts for Greece worth about $280 billion since 2010, but little of that money went into the Greek economy. Instead the money paid off Greece's original private lenders, effectively nationalizing the loans to the taxpayers of countries like Germany and leaving Greek taxpayers on the hook. Meanwhile, while the government shed over 250,000 jobs and the economy went into a tailspin, the rosy predictions of a return of "investor confidence" and a quick recovery thanks to slashed spending proved badly wrong.
Meanwhile cratering GDP saw debt rise relative to it to about 180 percent, making it impossible for the government to generate enough tax revenues and savings to start to pay it down. The IMF admitted as much in 2013.
But you can't get blood from a stone, and the international politics in Europe don't favor new compromise. Just as a view of northern Europe as a bunch of bullies running roughshod over Greece in a time of deep need have hardened in the country, so has the view of profligate Greeks who refuse to take responsibility for their government's choices taken hold in much of the rest of Europe.
Voter anger isn't just a Greek thing. German Chancellor Angela Merkel and French President François Hollande will face an angry backlash from their constituencies if they capitulate.
The eurozone's greatest weakness, which critics pointed out to little avail when the currency was unveiled in 1998, has also been made clear for all to see. A region with one currency but 19 independent governments with their own spending policies was the recipe for Greece's trap. On the hand Greece could suddenly borrow at cheap rates thanks to the euro's stability relative to the drachma, and the country went on a borrowing binge. But Greece's fiscal house was just as disordered as it was under the drachma. And when crisis came, instead of the local currency taking massive hits and deflating local currency debts, stimulating outside investment, and making Greek exports cheaper relative to competing nations, Greece was burdened by the strong euro.
The eurozone dream was of, one day, the Continent emerging as a sort of unified confederation. France and Germany have campaigned for countries to give up more sovereignty to secure the future of the currency union, but to no avail. The Greek vote today was a resounding "no" to that idea as well.