Thursday, 3 November 2011

Was it all for nought?

Greek Prime Minister George Papandreou is getting an earful today at the G20 summit in Cannes from world leaders furious at his shocking and sudden call for a referendum on the Greek bailout on Tuesday. The surprise announcement sent markets into a tailspin and seemed to, in an instant, eviscerate the deal painstakingly crafted last week by European leaders to save the euro. Now for the first time EU leaders are today openly talking about Greece leaving the Euro. Was last week's all-night negotiating session all for nothing?

Papandreou is facing the same level of fury at home, much of it coming from within his own party. His own finance minister broke ranks shortly after the announcement and reacted with incredulity to the idea of calling a referendum. Papandreou's Socialist government is now hanging by a thread as it looks like he will have to step down or face an imminent vote of no confidence.

Reports coming out of the G20 meeting this afternoon indicate that Papandreou may have been convinced to cancel his call for a referendum. But whether he cancels the referendum or his soon-to-come replacement does, it will only serve to enrage the Greek public further. Promising them a referendum and then snatching it away is undoubtedly worse than having never promised a referendum at all.

Angela Merkel and Nicolas Sarkozy have told Papandreou today that if such a referendum were to result in a 'no' vote it would mean Greece's immediate expulsion from the Eurozone. It's the doomsday scenario that no one has wanted to even mention for two years. But things have reached a boiling point today. Greece will get no more aid until the referendum is held on 4 December. In the mean time, the markets may panic and descend into chaos, particularly if opinion polls continue to indicate a majority of the Greek people will vote against the bailout and the austerity conditions attached to it.

Greece leaving the Eurozone may sound simple, but it is frought with potential peril. For starters, it would wreak almost unimaginable havoc on the country's economy because a return to national currencies was never envisioned by the Eurozone and there is no blueprint for how to do it. But the danger doesn't end there, it extends to the entire EU. Greece's exit could trigger a domino effect whereby Ireland and Portugal are forced to exit as well. This could in turn cause a financial collapse in Italy and Spain – who could themselves have to leave the Euro. Considering they are the EU's fourth and fifth largest economies, this would plunge Europe and indeed the world into a very serious economic crisis.

So what could have been Papandreou's motivation for leaving last week's eurozone summit at 6am on Thursday morning acting as if everything was certain, only to return to Greece and throw the question back into uncertainty a few days later? The prime minister says he felt it was his duty to consult the Greek people on this question that will affect the country for many years to come. More likely, he felt he needed the referendum as political cover for what is going to be a very unpopular decision. He likely hopes that if the Greek people themselves are forced to make the same choice he is now faced with, they too will conclude there is really no other option for the country.

In other words, he needs to bring the Greek people into the culpability zone for the austerity measures that are to come.

The G20 meetings continue tonight and tomorrow. US President Barack Obama has been in the possibly unprecedented position of being in the back seat at a G20 meeting. He is urging the Europeans to sort their mess out but in the end there is little he can do. As he acknowledged today, this is Europe's problem and only Europe can solve it. But Europe's problem has already become the world's problem. And right now it's looking like the problem is about to get to a whole new level of seriousness.

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