The aftermath of the Greek ‘No’ in referendum

By Anita van den Brandhof

The EU is failing to offer a strong answer to the Greek debt crisis, due to divergent interests between member states.

How did it all start?

When Greece joined the Euro in 2002, the economy and government structures were much weaker than other EU countries. This all changed when the Euro was introduced. Suddenly cheap loans became available, because the Euro offered more liability and lenders thought that the EU would repay the debts if Greece was unable to pay. Greece borrowed money on the international market and the economy grew fast. The borrowed money was not only used to support structural growth, but also for higher social benefits and the Athens Olympics.

The global financial crisis in 2008 hit hard on Greece. In 2009 the country admitted that the low deficit figures reported in 2002 were false. This ruined the Greek financial reputation: the deposits in Greek banks shrank and new loans from the international market became hard to obtain. In 2010 Greece had to accept the first bailout from the EU to prevent a complete bankruptcy. The loan of 110 billion euro came with a list of conditions that included reforms in the revenue collection system and significant budget cuts to bring down government spending. A second bailout of 109 billion euro was needed in 2011. The Greek government implemented most reforms and budget cuts, but it didn’t result in a healthier economy. The cuts in government spending increased unemployment, decreased consumer spending and also tax revenues went down. Since 2008, the economy has declined 25 percent and more than a quarter of the population became unemployed.

Grexit

The economic crisis resulted in a humanitarian crisis and political unrest. The Greek population is fed up with the conditions that came with the loans and are protesting against the European oppression. The leading leftish political party Syriza promised the Greek population that they will not accept new restriction from the EU. When the package deal for a new bail out scheme was finalized at the end of June 2015, Syriza decided to hold a referendum among its population. The majority of the Greek population voted against the new bailout program, to show their discontent to the EU. Without a new bailout, Greece would have to default. So what are the scenarios after the Greek rejection?

What could happen next?

In a sovereign country there are two methods to combat an economic crisis, but these measures are not available for Greece. Monetary measures, such as devaluing the Euro is not possible, are not supported because it will harm the stronger EU economies. Fiscal measures contain an increase in government spending, to bring about more investment. Greece cannot use fiscal measures, because the conditions of the loans stipulate that the Greek government has to cut its spending.

One way to get Greece out of the crisis is to waive the debts or postpone the payment, in order to give Greece space for investment and economic recovery. Waiving the debts would cost billions to the rest of the EU and is not popular among the stronger EU economies. In 2010 the Greek crisis was seen as a European crisis, because other Southern European countries also needed a bail out. However, the other countries have recovered and solidarity of the other EU members states towards Greece has evaporated. Especially the Dutch and Germans view Greece in terms of lazy, unreliable and incompetent. To raise public support in these countries for a new bailout plan is almost impossible.

A Greek exit of the Euro, “Grexit”, became a realistic possibility. Initially, the costs of introducing the old currency would be high, but it would give Greece the possibility to use monetary measures. The cost for the EU would be high as well, because it would hurt their reputation as a reliable financial partner and might cause a plunge in the stock market.

Most likely, the EU and Greece will come up with a temporary solution this week and postpone a Grexit. But the EU will not be able to find a sustainable solution for the crisis, due to its fragmented decision making procedures and divergent interests between the member states. It is possible that the EU will slightly increase the loans, to keep the Greek economy alive, but not enough to keep it from collapsing in the long run. In the long run a Grexit seems inevitable. Important for a Greek recovery after the Grexit is that it remains part of the single market economy of the EU, so that trade barriers are avoided and exports as well as tourism can be increased.

Anita van den Brandhof is a research scholar at Takshashila Institution.

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