WASHINGTON, D.C.—Pericles, the famed statesman of Athens’ golden age, must be rolling in his grave at the spectacle of last weekend’s bizarre Greek referendum.
Since, quite aside from its many irregularities, that referendum will have served only to exacerbate Greece’s acute economic and financial woes, thereby putting the country well on the path to exiting the Euro and becoming a failed state.
Among the stranger aspects of Greece’s surprise referendum was its very content.
In rather technical terms, the Greek electorate was asked to vote on whether or not it approved of the IMF and European terms offered on a loan arrangement to the country. Underlining the pointlessness of the referendum was the fact that the creditors’ offer was no longer on the table.
Equally puzzling was the reason why Alexis Tsipras, Greece’s youthful and inexperienced prime minister, would have put himself in a no-win position by calling the referendum against the express wish of Greece’s European partners.
As if to add insult to injury, he chose to throw his full weight behind securing a no vote in that referendum. He did so even though his creditors warned him that a no vote would be construed as a vote against Greece’s continued Euro membership.
Prior to the referendum, Mr. Tsipras had managed to unite all 18 Eurozone member countries against Greece by his high-handedness and unreliability in the negotiations over the preceding five months.
Now that Tsipras has defied his European partners by proceeding with a referendum against their express wishes, he will almost certainly have completely lost their trust.
While Tsipras might have secured his no vote by a surprisingly comfortable margin, he will now find that the referendum will have widened the gulf between Greece and its European creditors’ negotiating positions.
By helping to send the Greek economy into a new tailspin, the referendum will have almost certainly dealt another body blow to the country’s already shaky public finances.
Mr. Tsipras must now expect that the IMF and European Union will require even more budget adjustment measures and structural reforms from Greece than it did before in order to bring the country’s public finances back on track.
Further clouding the prospects for the successful conclusion of negotiations is the fact that the referendum will have severely limited Tsipras’s political room for maneuver to make any new concessions.
After all, the Greek electorate voted once again by a wide majority against the country continuing with the austerity and structural reform that had been imposed on it from abroad.
The last thing that Greece’s rapidly failing economy can now afford is a definite rupture in its loan negotiations.
Already the country has been living from hand-to-mouth with the government running out of cash and struggling to make each month’s public wages and pension payments.
A renewed downturn in the economy would only exacerbate the government’s cash crunch and force it to issue IOU’s to make its payments. Were that to occur, Greece would have come one step closer to exiting the Euro.
Mr. Tsipras is right to consider the overwhelming no vote that the electorate delivered as a vindication of the tough line negotiating position.
However, he would be deluding himself if he thought that the referendum will soften the stance of Greece’s creditors, who have to account to their own electorates.
Rather than crowing over his victory, Tsipras should be bracing himself for Greece’s ignominious Euro exit.
Desmond Lachman is a resident fellow at the American Enterprise Institute (ael.org). He earned a Ph.D in economics at Cambridge University. He was formerly a Deputy Director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney. Readers may write him at AEI, 1150 Seventeenth Street NW, Washington, DC 20036
