Markets around the world tumbled yesterday on the news that Greek Prime Minister George Papandreou would call for a referendum on the rescue agreement struck last week by the leaders of the EU countries. The plan would provide the Greeks with a lifeline to avoid default and remain in the monetary union. European banks would accept a 50% cut in the face value of Greek debt. In exchange, Athens would have to agree to deeper fiscal austerity measures. European leaders who ratified the plan did so at tremendous political costs to themselves — no taxpayer in a solvent European country wants to bail out the Greeks for decades of reckless spending. Now, the Greeks are looking ungrateful to boot.
There’s no doubt that Papandreou, a Socialist elected in 2009, has drawn a lousy hand. He inherited a fiscal catastrophe from his “conservative” predecessor. He has been at the mercy of his creditors, primarily the EU and IMF, whose largesse has thus far kept the Greek budget above water. Their bailouts have come on the condition that he dismantle the welfare state that his party helped create, cutting hundreds of thousands of government jobs, raising taxes, and sending the economy into deep and painful decline. His popularity has followed a similar downward path, and many Greeks have taken to the streets in protest.
Now, the politicians and bankers from Paris, Berlin, and London are demanding another pound of Hellenic flesh. Papandreou’s move, in terms of domestic politics, could be considered savvy, inevitable, or both. He has shouldered the entire political burden of the unpopular-but-necessary austerity measures, while his opposition — the party that is possibly most culpable for the current mess — has sat by and sniped. A successful referendum would provide a public mandate for his policies, thereby solidifying his standing and undercutting that of his opponents. If it were to fail, the opposition would be forced to accept responsibility for the default and its aftermath. But by most accounts, the true impetus for the referendum is that Papandreou has run out of political capital. He simply doesn’t have the ability to push another round of cuts through his razor-thin parliamentary majority. Viewed through the lens of Greek politics, the referendum is an entirely rational decision.
The problem is that these days, the consequences of Greek’s political decisions extend far beyond the water’s edge.