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The stunning decision by Prime Minister George Papandreou to send the recent deal with Greece to a popular referendum has thrown markets into turmoil, roiled the Greek political world, and cast fresh doubt on the viability of the rescue plan for Europe as a whole. Papandreou's goal, he said, was to solicit a verdict from the Greek people on the most recent demands from the euro area and the Greek debt restructuring. His political objective is clear. He wants to spread the burden of Greece's painful program of austerity and force his political opponents to realize that Greeks have no real choice but to continue down the tough road he has led them on so far. How the opposition responds, and whether a referendum actually takes place, is far from clear. But the gambit has greatly increased the risk entailed by short-term delays in implementation of the necessary reforms that Greece must undertake to regain solvency and economic health.
The threat to hold a referendum on the new debt deal should be seen in this light: as an attempt to force other Greek political parties to share responsibility of the pain that Greeks have had to endure and that they face in the future.
As Papandreou knows all too well, the political costs of implementing the International Monetary Fund (IMF) program in Greece have so far been carried on the shoulders of the Panhellenic Socialist Movement (PASOK) party. Following the last parliamentary vote a few weeks ago to finally begin furloughing or laying off Greek public sector workers, it is clear that such tough measures will no longer be politically sustainable within PASOK. Not surprisingly, Papandreou is looking for a better arrangement to extend the political responsibility for overhauling the Greek economy beyond the socialists.
The threat to hold a referendum on the new debt deal should be seen in this light: as an attempt to force other Greek political parties to share responsibility of the pain that Greeks have had to endure and that they face in the future. So far, Greece has been the only major country in Europe in which the main opposition party—New Democracy under Antonis Samaras—has refused to join the political support for the IMF austerity program. Instead, New Democracy has been espousing a completely irresponsible and unrealistic notion that it could renegotiate the program with the so-called troika consisting of the IMF, the European Central Bank (ECB), and the European Union. Papandreou is now trying to force an end to this cynical political ploy.
The reality—well known to Papandreou—is that beggars can't be choosers. Any Greek government has no alternative other than to accept the deal negotiated with the euro area, or at least 99 percent of it. In light of the mediocre Greek program implementation in recent months, it is extremely unlikely that the other euro area countries or the IMF will provide the Greek government any policy concessions when negotiations are renewed later this year. A revision of the program is even less likely to occur if Papandreou is fighting a referendum campaign at the same time.
An abrupt end to the current IMF program and the associated "hard Greek default" will be by far the worst imaginable economic outcome for Greece. Such an occurrence would inflict far more damage on Greeks than on the euro area as a whole. But Papandreou could be playing with a weak political hand in this game of chicken. If he is hoping for concessions, his bluff is likely to be called by the euro area. Chancellor Merkel and the new ECB president Mario Draghi will make it clear that it is "take it or leave it" for Greece. In that situation, going ahead with the referendum would be enormously risky for Papandreou, Antonis Samaras, and Greece as a whole.
Referendums are always about public perceptions and misperceptions. If a referendum were called, and the public saw it as a choice between the current deal and some imagined new and better IMF deal to be negotiated in the future, Greek voters would probably reject the current deal. But that is not the actual choice. Rather the choice would be between the current deal and a "hard default," costing Greece any economic support from the euro area, the IMF, and the ECB, sending the country into a catastrophic domestic economic collapse.
Ironically, it is in George Papandreou's own interest to promote this all-or-nothing choice for Greece and force the opposition into supporting the IMF program. Certainly, euro area leaders will make this choice clear to all Greek political leaders, helping to force even the opposition party, New Democracy to rethink its current cynical strategy and join a unity government or participate in an election in which both parties broadly agree to support Greece staying in the euro area and adhering to the IMF program implementation once the elections are carried out.
Greek voters must realize that their choice is whether to stay the course or become a third world country. Despite all the sturm and drang, it seems unlikely that they would commit that kind of collective economic hara-kiri, but it cannot be completely ruled out. That is the leverage Papandreou is now trying to bring to bear on his political opponents in Athens.
For financial markets, however, the death of the domestic political IMF program implementation strategy for Greece means increased political uncertainty and volatility of markets in Europe.
