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While we’ve been debating the Supreme Court, there’s been a whole lot of noise going on in Europe over the snap referendum the Greeks have called on their loans from the IMF, the European Commission, and the European Central Bank (hereinafter “the troika,” as they are commonly known in Greece and Cyprus — usually with an epithet as a modifier.)
Here’s a guide to what’s happening and what’s at stake, as well as a few thoughts on what we’ll see on Monday.
This is a very odd referendum. Normally, the troika and the Greek government — currently controlled by the left-wing Syriza party that swept to power 8 months ago on a pledge to not borrow more money and get out from under the troika’s economic stabilization plan — would agree to some compromise. Syriza’s leader, Prime Minister Alexis Tsipras, would go on television, announce the agreement, and ask the people to vote to support it. (Chances are the compromise would include his breaking a couple of promises, so he’d want the people’s blessing to do so.) But no, this referendum comes after Tsipras left negotiations and flew back to Athens without an agreement — and he is putting the troika’s deal on the table. It is clear he would like the public to vote no.
Towards what end? That isn’t clear. Should the Greeks vote no, it becomes most likely that they will leave the euro and default on their loans. They get to be Argentina on the Mediterranean. If they vote yes, they then get snap elections for a new government because Syriza’s plan will have been rejected. They will also get major cuts to pensions and other government spending. That is probably best in the long run, but it’s a great deal of short-run pain. Either way, they will be the sick man of Europe for a generation.
Clearly Tsipras thinks he can use a ‘no’ vote to leverage a better deal from the troika. But the troika are in a foul mood. The referendum was a shock to them — and a breach of trust. The Eurogroup issued a press release Saturday morning saying that the referendum is too late (the agreement from the previous extension ends June 30), and that it’s Greece that broke off the talks. European finance ministers have said they wanted to continue talking but see no point. Meanwhile, Greek finance minister Yanis Varoufakis, who has been a pain in the side of the troika, rejected the statement and said that the EU rules do not permit them to kick Greece out. (They also do not permit the funding that Greece has already received. Perhaps we should turn Chief Justice Roberts loose on the Treaty of Maastricht.)
So this becomes a classic ultimatum game (Varoufakis is a game theorist, in case you didn’t know.) The EU believes the Greeks have to blink because there’s pain either way the referendum turns out, and this will probably costs Tsipras his job. The Greeks believe the EU has to blink because opening a door to let Greece out of the Euro also creates a door for Spain, Portugal, and Italy.
How does Monday play out?
- Given the run on ATMs, there will be capital controls, ala Cyprus, if the Europeans carry through on their threat to stop lending to Greek banks . There’s a much-greater-than-zero chance of bank holidays. There is a €1.55 billion payment due Tuesday to the IMF. It is possible Greece can make the payment and thus buy time, but that’s very uncertain in light of the last 24 hours of bank runs. And it’s most likely a threat point for Syriza to play in this game.
- If all that happens, expect video from Athens of a bunch of bankers burning in effigy. These will include figures more obscure than Frau Merkel, who is herself as popular in Greece as Anthony Kennedy at an evangelical convention.
- Talks will continue. Both sides know something bad can happen, and they have much uncertainty about what that will be. So the desire to get a deal done is there, but it will take a few days to play out.
Europe is, if nothing else, masterful at letting these crises continue for weeks past where you think they’ll hit a tipping point. Don’t be surprised if that happens again here.Published in