Oh my my!Just when the financial markets thought that the whole Greek mess had ben resolved, the Greek Prime Minister George Papandreou has thrown a major wrench into the works of the carefully constructed EU bank bailout. He has stated that he will hold a referendum on the EU bailout. This will only be the second referendum since Greece got rid of the military dictatorship that ran the country in 1974. It is expected that the referendum will take place in January 2012.
Papandreous said in his announcement:
Unveiling his referendum plan, Papandreou said: "Citizens are the source of our strength and citizens will be called on to say 'yes' or 'no' to the agreement. It is not for others to decide but the Greek people to decide … we have faith in the people. We believe in democratic participation. We are not afraid of it (http://www.guardian.co.uk/...).
Words are cheap, if they believe in democratic participation, why not call for elections?
Needless to say this announcement has not been greeted with glee by global markets:
The euro fell to a session low of $1.3827, down more than 2 per cent on the day and erasing its gains from last week, when the deal was first announced. US stocks accelerated their decline as well, with the S&P 500 index ending the day down 2.5 per cent. It was the index’s worst one-day fall in nearly a month, ending what had been stocks’ best month since 1991, with a gain of 10.7 per cent, on a sour note (http://www.ft.com/...).
and
Stock markets, which have rallied in recent weeks after a sustainable deal looked more likely, reacted immediately to the news with a sell-off of shares. In New York, the Dow Jones index of leading companies fell sharply as Papandreou's plan was revealed. The euro fell 2% against the dollar and the US Volatility index – the so-called "index of fear" – climbed 22%, its biggest one-day rise since mid-August (http://www.guardian.co.uk/...).
Undoubtedly, this could throw a major wrench in the works.
How could the Greek population be happy about this deal? The extent of the austerity measures will devastate the Greek social welfare state and public sector. Privatisation of nationalised industries will not raise the money needed for debt repayment. They are suspending collective bargaining, cutting public sector wages by 30%, monthly pensions over 1000 euros will be cut by 20%, for those under 55 years that have retired pension payments will be cut 40% on those that earn over 1000 euros/month. Let's not discuss the rising taxes, many of them flat taxes or VAT which hits the poorest and those on fixed incomes the hardest (if you want more detail read: http://www.bbc.co.uk/...).
The response on the part of the population has been rather robust to say the least. There is no doubt that the Greek population is not particularly happy about the austerity measures that are demanded as part of the bailout (http://www.bbc.co.uk/...; http://www.bbc.co.uk/...). There have been demonstrations, 48 hour general strikes (not only by public sector workers); the finance ministry along with other government ministries were occupied. Recent polling has indicated that 60% of the population oppose the deal (http://www.guardian.co.uk/...; http://www.ft.com/...).
Additionally, PASOK (the ruling greek socialist party) has lost the support of the unions, ministers have defected and popular support has plummeted. It is questionable whether they can actually govern the country.; their majority has been reduced to three seats (http://www.guardian.co.uk/...). A vote of no-confidence will be held in Parliament later this week as a prelude to a call for the referendum.
So, the question arises why call for a referendum on the bailout package? some possible answers:
1) PASOK knows it does not have support and is passing the responsibility to the Greek population:
2) opposition from the right (New Democracy Party) and the Left (Communist Party) are demanding elections knowing that it will bring down the government. But getting the right in power is not in the interest of the majority; the Parliamentary Left needs to ensure that they have extra-parliamentary left support and the support of the trade unions. Papandreaou may be using the possibility of a referendum as a stall tactic so as to remain in power for a bit longer to avoid elections.
3) They believe that a referendum will allow them to frame the discussion which they have lost control of recently. The Greek population does not like the austerity measures, but there is great reluctance to leave the eurozone (for some reason the Government has been pretending that they would be thrown out of the EU but there is little evidence for that assertion).
The Greek finance minister, Evangelos Venizelos, said the popular vote – the second to be held since democracy was restored to the country after the collapse of military rule in 1974 – would ultimately boil down to two choices. "Do Greeks want to remain in Europe, with the euro, in a country that belongs to the developed world, or do they want to return to the 60s? Do they think it is good to owe €100bn to the banks or do they not think it is good to live with such debt? (http://www.guardian.co.uk/...).
However, the EU leaders have said that they will not allow Greece to leave the eurozone; so is the framing proposed by the Greek finance minister Venizelos valid? Since they will not allow them to leave the eurozone or allow an uncontrolled default, then how can they legitimately frame the discussion this way?
The EU said it would not allow either an uncontrolled default of Greek debt or the country to leave the eurozone, the bloc's economic commissioner said. "An uncontrolled default or exit of Greece from the eurozone would cause enormous economic and social damage, not only to Greece but to the European Union as a whole, and have serious spillovers to the world economy," Economic and Monetary Affairs Commissioner Olli Rehn said. "We will not let this happen," he added (http://www.bbc.co.uk/...).
If this is the case, it makes a lot of sense of the Greeks to reject the referendum; they will not be thrown out of the eurozone, nor Europe, and they can demand a package which does not destroy the possibility of economic growth for the country. The austerity measures will cripple the country's economy and the demands of the EU, European Central Bank and the IMF clearly are more concerned with protection of Greek, European and International Banks rather than the Greek economy.