Greece’s 5 July referendum has made clear what Alexis Tsipras and his government had been saying for months: the terms of the international bailout that the so-called troika — the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) — offered to Greece (and had partially withdrawn) are unacceptable. More than 60 per cent of voters rejected the bailout.

Having gone through a rather inflexible set of measures to substantially reduce the budget deficit within a relatively short time span, in 2014 Greece achieved a primary surplus of €1.9 billion, an achievment that required a great deal of effort, but missed the €4.9 billion target. When asked whether they wanted to stick with more or less the same austerity policies, the Greeks rationally said ‘no’. With the country’s unemployment rate currently at 25 per cent, the size of the economy is 25 per cent smaller than it was in the pre-crisis years. On top of that, Greece’s public debt stands at approximately 177 per cent of GDP; it was 157 per cent in 2012. Why should the Greek people have voted ‘Yes’ in the referendum when it would continue the same painful and inconclusive measures?

No to austerity, not to euro

But Sunday’s referendum has been more than just a mechanism for voters to express their preferences and change policy courses. It has also challenged the framing of Greece’s predicament.

The country’s creditors had implicitly bundled together Greek voters’ acceptance of the bailout terms and their willingness to live within the ‘rules’ of Europe’s monetary union. As a result, the referendum was treated as an unnecessarily — and dangerously — binary choice: either austerity and accept the euro, or reject it and leave. As Jean-Claude Juncker, the president of the European Commission, made clear a few days before the referendum, ‘no would mean that Greece is saying no to Europe’.

But for the Greeks, it was never so clear cut. And now, what some have called ‘deliberate ambiguity’ on the part of Tsipras and Co. could pay off. Hopefully — and this would be the best scenario — the Greeks have not said ‘no’ to Europe and so Europe should not say ‘no’ to Greece. Thus, negotiations should resume between Greece and its creditors to find a compromise and agree on a mutually acceptable solution to the sovereign debt crisis. But short of a substantial debt restructuring that gives Greece the necessary fiscal space to rekindle economic growth and the supply-side reforms – such as, for example, the liberalization of professional services – that are needed to make the economy more efficient, it is difficult to see any substantial improvement on the current deadlock, with Greece keeping the euro while mired in constant negotiations over its debts and economic policies as successive payments come due.

This gloomy scenario implies protracted political uncertainty and market instability, and an unhappy future in which the level of animosity perilously increases in Greece and elsewhere in Europe as the support for Europe’s single currency dwindles everywhere — especially in the euro periphery — and euroscepticism continues to rise. (Already, for instance, just some 56 per cent of Italians back the euro.) And so the game of who should be blamed for the Greek crisis — the current government, the previous governments, the troika, the Germans and so on — continues, with the additional risk of fomenting divisions, nationalism, and even racism — all sentiments that the Europe project was intended to contain and offset.

Fundamental flaws

The unfolding of the Greek crisis has exposed the fundamental fragility of the European construction. Europe was built on the idea that supporting a common currency and common economic interests would always prevail in domestic politics and voters’ preferences. This might be true when good economic conditions translate into growth and job creation across the board, and indeed the initial years of Europe’s monetary union were a resounding success. But is it plausible to expect countries to stick to their commitments when the going gets tough?

Almost two decades after its creation, it is screamingly obvious that Europe’s monetary union is neither an optimal currency area nor a strong political project — for years politics has provided the fig leaf to cover the single currency’s economic flaws. At best the monetary union is a half-baked experiment with huge shortfalls in its institutional design. At worst, it is an unsustainable mess where voters’ preferences in one country (for instance, for more accommodating fiscal policies) sometime conflict with the preferences of voters in another country (for instance for more fiscal ‘probity’). This is what is happening in Europe, and it is too simplistic to push the blame on the Germans or on the Greeks — or even on the troika.

Where do we go from here? It is critical to reflect on whether there is room to turn Europe’s monetary union into a fiscal union and eventually into a political union. This would mean not only embracing the harmonization of standards and regulations that would underpin the single market and the single currency, but also sharing the burden of adjustment, and accepting, for example, fiscal transfers from a ‘euro’ budget to countries that experience financial hardship. Of course, a eurozone-wide political framework implies that member states would need to surrender a good deal of sovereignty and create ‘euro’ institutions that are accountable to and representative of all euro citizens. But if this option goes against the preferences of the eurozone member states and their citizens, then the monetary union needs to be transformed into a mechanism for sharing a common currency that members can leave when they cannot adjust.

Neither of the two options are easy to implement and both would require significant institutional transformation. But doing and redoing the same thing in order to keep together conflicting goals and preserving the status quo is no longer tenable. It is perhaps too early to say if the Greek referendum has patched up the crisis or has made things worse. However, unless some fundamental change is soon made it to Europe’s monetary union’s institutional design, it is a just a matter of time before the next crisis turns fatal.

A version of this article originally appeared in Foreign Policy.

This article is published in collaboration with Chatham House. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Paola Subacchi is director of the International Economics Department at Chatham House.

Image: A woman waves a Greek national flag (L) and a European Union flag during a rally outside the parliament, calling on the government to clinch a deal with its international creditors and secure Greece’s future in the Eurozone, in Athens June 18, 2015. REUTERS/Yannis Behrakis.