Greek voters overwhelmingly said “no” to more austerity on Sunday in what was more a broad referendum on the country’s place in Europe than a question of any specific policy. It’s unclear what will happen next but by understanding why Greece is so fed up with Europe, we might get a bit more insight into the future of the country as well as the continent.
Why Greece voted No
Greeks have been, to put it mildly, fed up with the austerity policies demanded of it by the so-called Troika (the European Central Bank, International Monetary Fund, and European Commission). For many, austerity has prevented the Greek economy from recovering, keeping many out of work and tax revenue out of government coffers. Meanwhile, the bailout funds that it has received have mostly gone toward repaying Greece’s debt to Europe.
It was a bit unclear what exactly the referendum was asking about – the bailout package that had been on the table when the vote was first announced a week ago expired on June 30. But Prime Minister Alexis Tsipras has portrayed Sunday’s vote as one on Greek sovereignty and European unity.
“Greek people today gave an answer to [the question of] what Europe we want. And what we want is a Europe of solidarity,” Tsipras said after the referendum results were announced, adding that “today we are celebrating the victory of democracy.”
What Happens Next
Less than 24 hours after the vote ended, Greek finance minister Yanis Varoufakis has resigned:
Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.
Varoufakis, an economist whose work has focused on game theory, has been a controversial figure during his short tenure. He notably declared last week that he would resign if Greeks voted “yes” in Sunday’s referendum, but the discomfort among European negotiators apparently was too much to make his continued involvement tenable even after “no” won.
Henry Farrell of the Monkey Cage blog has a good explanation of how bargaining theory applies to this case, saying that “the referendum has both constrained and strengthened the Greek government in its negotiations with other European member states and institutions.” That Greek voters chose “no” sends a strong signal to the country’s negotiating partners of what it will accept, so it’s possible that Greece might see a better deal. That is if a deal can even be reached. The referendum result may have sent the Germans and others in Europe a very different message, given their sharply divergent perspective.
Farrell describes this key difference in perception:
Perhaps the most fundamental problem that Greece and its E.U. partners (especially Germany) face is that they profoundly distrust each other. Greece interprets its situation as one of unending austerity, where E.U. member states seem willing to relentlessly and cruelly impose pain on Greek citizens (e.g., the Greek health-care system has been completely devastated) with no prospect of relief. Germany sees itself as having poured hundreds of billions of taxpayers’ money into building a European economic system that has to be based on clear rules, and it views Greece as a country that has repeatedly demonstrated that it is unwilling to abide by those rules.
That difference in perception explains much of the acrimony between Athens and its creditors, especially the Germans who have led the effort over the past five years.
But not all of Europe shares Germany’s drive for austerity. Officials in Britain, France, Spain, Italy, as well as the European Commission, have all called for a resumption of talks in the wake of Sunday’s vote. And French economist Thomas Piketty gave an interview Sunday with German newspaper Die Ziet in which he served up a blistering critique of Germany’s own record of debt, pointing out that much of the country’s debts were forgiven after World War II:
When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.
Varoufakis’ resignation may increase the odds of a deal being reached, adding more evidence that the political is taking precedence over the purely economic in these negotiations. Eurozone leaders are scheduled to meet on Tuesday to discuss the way forward, and if they are indeed more amenable to a deal, Sunday’s vote may, as Farrell said, help push its terms closer to Greece’s benefit.
But Greek banks are running out of cash and without help from the European Central Bank, an implosion of the country’s financial system may be imminent. The E.C.B., however, will almost certainly not act until European leaders decide the thorny political questions.
How does this affect the world economy?
On Monday, the euro weakened and stock markets worldwide fell on the referendum news. But, for the most part, the immediate response has been relatively muted compared to the apocalyptic warnings of what a Greek default and possible “Grexit” (Greek exit from the E.U.) might entail.
Helping to insulate the world economy is the fact that Greece is not a big trading country. Much of its economy is focused on the tourism industry. For that reason, the consequences of its economy collapsing as well as a potential Grexit should be fairly limited in scope. There’s also the fact that the EU has had five years to prepare for that outcome; both in Europe and elsewhere, investors have had plenty of time to see the crisis and adjust financial decisions accordingly.
But while there doesn’t appear to be much in the way of a direct threat via trade or investments, stock markets have been nonetheless spooked by the possibility of a Greek collapse. Nobody knows exactly what will happen if Athens spurns the euro or Brussels decides to sever ties. The biggest threat may be to the standing of the EU and the viability of the euro as a currency. If the “no” vote precedes a separation, suddenly the dream of a united Europe falls apart and the eurozone becomes a fragile, uncertain currency union which could be further undone by other state economies (Portugal, Spain, and Italy have all had problems in the recent past, for example). But if Europe backs down and helps Greece, suddenly the terms of membership become much more lax; profligacy appears to have no consequences.
In other words, either option looks bad for Europe – and that could drive markets down even if pure trade and direct investment in Greece won’t, on their own, hurt other economies. The crisis has been in many respects a conflict between perceptions, and the way leaders and investors perceive the politics of the situation will be, ultimately, what drives the broader economic consequences. As The New York Times’ Neil Irwin points out, “the time for [economic] debates is over for now; we’re in a realm of power politics, not substantive economic policy debates.”