Mr Tsipras’s call for the 5 July referendum about the Eurogroup proposal is an ideal outcome for official creditors. Thereby, Greek people will either give a mandate to their government for continuing the implementation of the financial assistance programme, or vote for uncertainty. I do think that a no vote would ultimately lead to financial, economic and political chaos and may culminate in Grexit. But with a yes vote, the so-far arguably cumbersome, ineffective and unfriendly negotiations would be largely over and the discussions should be focused on the details and the implementation, not on the main principles.
In a European Union founded on the principle of democracy the referendum should be welcomed. All other politically feasible solutions would have just prolonged the uncertainty. The Greek government perceives that its mandate received from January 2015 election does not allow to accept the creditors’ offer. Thereby, any forced agreement on a slightly modified version of the conditionality demanded by creditors would have likely led to implementation problems and future disputes. And a collapse of the Greek government may just lead to political paralysis and an even more uncontrolled situation.
The Eurogroup statement issued after the talks broke down on Saturday 27 July plainly reiterates that the current financial assistance programme will expire on 30 June 2015. It does not include any indication that the deadline will be extended a few days after the referendum. Thereby, the Eurogroup statement makes the referendum largely useless.
The Heads of State and Government of euro-area countries should make a decision to extend the current bail-out deal a few days after the referendum. A democratic Europe should allow Greek people to have their say on such a historical question.
The extension of the current bail-out programme (or the lack of it) may influence the decision of the European Central Bank, which will be crucial for the next few days. The ECB should not reduce liquidity assistance to Greek banks. Either a bank holiday or severe limitations on cash withdraw/electronic payments seems inevitable before the referendum, but banks would not be able to survive a reduction in central bank liquidity support. A collapsing banking system would drag the economy down even further. The ECB may not increase liquidity support in the coming week, but at least it should wait for the result of the referendum before curtailing existing support, since with an extension, Greece will continue to be under a financial assistance programme.
In the meantime, creditors should lower the planned fiscal adjustment requirements. Greece has implemented by far the largest fiscal adjustment in the EU. A somewhat lower primary surplus would not make a big difference to public debt trajectory in light of the miserable miscalculation of the 2010-12 programme assumptions. A new ESM loan (based on the conditionality which will be voted on the referendum) should be offered to repay maturing ECB-held Greek debt.
The IMF should restructure its Greek loans the same way as European lenders did.
According to opinion polls, the majority of Greek people wish to stay in the euro area. If the risk of Grexit is eliminated and reforms continue, the Greek economy is destined to grow to the benefit of Greek people and the country’s lenders. At this historical moment euro-area leaders should allow Greek people to make their voices heard and the ECB should wait for the referendum before curtailing Greek banks’ access to liquidity.
This article was originally published by Bruegel, the Brussels-based think tank. Read the article on their website here. Publication does not imply endorsement of views by the World Economic Forum.
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Author: Zsolt Darvas is a Senior Fellow at Bruegel.
Image: A European Union flag (L) and a Greek national flag flutter as the sky is reflected on a building front in Athens February 17, 2015. REUTERS/ Alkis Konstantinidis