Damned if you do, damned if you don't

Published 29.06.2015 20:13
Updated 30.06.2015 09:28

A referendum was called for by Greek Prime Minister Alexis Tsipras over the weekend to be held this Sunday. The Greek electorate will decide whether they support the final eurozone proposal to increase taxes, cut pensions and ramp up austerity in return for more loans. Tsipras has urged voters to vote "no," rejecting the eurozone's loan program. Should a majority of Greeks agree with Tsipras, Greece would almost immediately default on the repayments to the International Monetary Fund (IMF), eurozone and European Central Bank (ECB).

Last week I wrote that the eurozone would play ball, agreeing to help Greece in exchange for political cover in the form of token concessions. Tsipras, however, in a masterful political move, would be damned if he let Brussels strong-arm him into reneging on his election promises. Accepting the proposal unilaterally would guarantee an early end to the 41-year-old's political career. So, he did what any shrewd politician would do: Put it to the people. Although the referendum will be close, the Greeks will choose to accept the bailout plan rather than risk leaving the eurozone. Much of the electorate remembers a pre-euro environment and wants to desperately avoid going back to those days.

Greece's economy, like Turkey's, experienced a tumultuous period in the '70s, '80s and '90s. The implementation of the euro was a godsend for Greece, as it was for their euro-Mediterranean brethren. Handing over monetary policy to the ECB ensured that politicians with no experience running an economy would not be able to influence decisions at national banks. Re-relocating that monetary policy making to Athens now would almost certainly force Greeks to relive those days.

So, in this scenario, a referendum will be held, it will be accepted and Tsipras and his Syriza government will "lose" the referendum, giving them ample political cover in the near-term. "We warned you not to vote for the bailout," they will argue when the Greek government again faces problems in adhering to the austerity measures in the face of predictable near-constant protests against further belt-tightening. The Greek economy will continue to shrink and the eurozone may continue to string it along. The eurozone would rather pump a few billion euros into Greece every month than risk the first cracks in the monetary union.

Greece is currently the second-to-last country globally in terms of its gross domestic product (GDP)-to-debt ratio, beaten only by Japan. Having traveled throughout Japan this week, talking with academics and economists, I've found there is little comparison between the two countries. That a high GDP-to-debt ratio may not necessarily be crippling to an export-driven country such as Japan. The same cannot, unfortunately, be said for Greece.

Japan can, and has, devalued its currency recently with their own round of quantitative easing, increasing debt in exchange for the promise of increased growth, lower unemployment and ultimately the ability to repay that debt. It's like pruning a tree; the branches will grow back stronger, argue supporters of Abenomics - the term coined in reference to the fiscal policies implemented by Japanese Prime Minister Shinzo Abe. However, Greece does not have this luxury. With its monetary policy outsourced to Frankfurt, it is at the mercy of the ECB.

The worst part of this upcoming referendum that the Greeks will vote in is that there's really no choice. Austerity or a "Grexit" (Greek exit from the eurozone)? Both are equally terrifying, although the predictability with continued austerity - fear of the known - will be preferred over fear of the unknown - exiting the eurozone. What would happen in that insistence? What would happen if Syriza actually got what it says it wants? A rejection of the eurozone's proposal, default, a return to the drachma, currency devaluation and then what? This uncertainty will cripple the voters with fear, most likely causing them to accept this final bailout proposal.

In a perfect world, the Greeks would reject the eurozone's proposal, return to the drachma and the Syriza government would start anew. The depreciation of the currency would make Greece much more competitive in the European Union and attract European jobs. Tourism, already nearly 20 percent of GDP, would increase as Greece became more attractive to the euro-rich tourist. Industry, although less of a contributor to GDP than tourism, would be spurred and Greece would return to stability.

The reality is that we don't live in a perfect world and there is little chance of this happening because of the fragmented nature of Greek politics. No coalition government would survive to see these policies implemented.

I predict the referendum will pass with 58 percent of the vote.

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