Commentary Magazine


Topic: Eurozone

The Referendum Was a Disaster for the Greek Left

There is no small amount of irony in the fact that the Greek referendum, which resulted in a resounding rejection of the terms of a fresh bailout from Greek creditors, has so spectacularly backfired. The members of the far-left Greek Syriza Party that sought a plebiscite resulting in the rejection of “austerity” hoped to cloak themselves in the legitimacy of a mandate at the polls. Instead, they have been made to accept even harsher terms from Brussels. Betrayers, Syriza must now come crawling back to their fellow Greeks on hand and knee, begging for the ratification of an even worse deal from the Greek perspective. Read More

There is no small amount of irony in the fact that the Greek referendum, which resulted in a resounding rejection of the terms of a fresh bailout from Greek creditors, has so spectacularly backfired. The members of the far-left Greek Syriza Party that sought a plebiscite resulting in the rejection of “austerity” hoped to cloak themselves in the legitimacy of a mandate at the polls. Instead, they have been made to accept even harsher terms from Brussels. Betrayers, Syriza must now come crawling back to their fellow Greeks on hand and knee, begging for the ratification of an even worse deal from the Greek perspective.

Fiery populist Greek Prime Minister Alexis Tsipras has been truly humbled before a Europe that his party rose to power pledging to defy. In the wake of the historic “no” vote that was billed by Tsipras and his supporters as a victory for sovereignty, he has instead been forced to agree to the passage of significant reforms in exchange for yet another bailout. “He agreed to far more than simple austerity, pledging even to stage what may amount to a fire sale of Greek utilities, even plots of land on its islands, to help pay back its huge debt,” the Washington Post reported.

Just weeks ago, Finance Minister Yanis Varoufakis assured the Greek public that the referendum would compel Europe to recognize the futility of demanding his fellow Greeks take a haircut. He promised a new, better deal for Greece’s pensioners within 48 hours of a “no” vote. Instead, Varoufakis was compelled to resign his post. He might have been just the first of Syriza’s wide-eyed academics to be ousted from government; the stark terms of this new deal are likely to spark an internal crisis within the Greek left that could result in the collapse of the government and the expulsion from the governing party of a number of its more hardline members.

It’s striking that the cradle of Athenian democracy would again be undone by its excesses. The Greek referendum is a testament to the foresight of America’s founding generation that tempered the excesses of majoritarianism by establishing a representative republic. “As there is a degree of depravity in mankind which requires a certain degree of circumspection and distrust, so there are other qualities in human nature which justify a certain portion of esteem and confidence,” James Madison wrote in Federalist No. 55. “Republican government presupposes the existence of these qualities in a higher degree than any other form.” In that same piece, Madison declared that he believed “the liberties of America cannot be unsafe in the number of hands proposed by the federal Constitution.” Key to that endorsement was his assessment that “the number of hands” would be necessarily small and manageable.

Syriza tried to abdicate its responsibilities as a governing party by ceding that authority to the public. When the people had spoken, Tsipras’ government declared it a mandate – a righteous demand of the sovereign Greek people, in fact – that would reverse the laws of fiscal gravity. The majority will, when given the chance, vote themselves an unsustainable fantasy. Humiliated, Tsipras government teeters as it struggles to hold the weighty Eurozone project aloft. Rather than finding themselves liberated by the virtue of the people, Syriza is instead shackled by their untenable demands.

Tomorrow, Europe will struggle with the prospect of the disintegration of the Eurozone and the prospect that Russia, China, Turkey, and other aspiring regional hegemons will take advantage of the crumbling post-war order. Today, Greece must contend with the spoils of its pyrrhic victory over what Paul Krugman called Europe’s “truly vile campaign of bullying and intimidation.” In the end, the lender always gets his due, no matter how the borrower votes.

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The Greek Crisis

Greece ordered it banks to close today to abort a run on the entire banking system. Depositors, fearing default and the loss of their money, have been getting their deposits out while the getting was good. Fear in financial markets is highly contagious. There’s a reason these sorts of events are known as panics. Something similar happened in this country in the late winter of 1933, before Franklin Roosevelt’s inauguration, with the same governmental response. The Greek central bank also imposed limits to keep an increasing flood of money from leaving the country. Read More

Greece ordered it banks to close today to abort a run on the entire banking system. Depositors, fearing default and the loss of their money, have been getting their deposits out while the getting was good. Fear in financial markets is highly contagious. There’s a reason these sorts of events are known as panics. Something similar happened in this country in the late winter of 1933, before Franklin Roosevelt’s inauguration, with the same governmental response. The Greek central bank also imposed limits to keep an increasing flood of money from leaving the country.

Stock markets sank on the news (but then rebounded somewhat) while such safe-harbor investments as U.S. and German government bonds ticked upwards. German ten-year bonds are currently yielding a piddling .79 percent while Greek bonds tumbled so badly that the falling price pushed the yield up to an astonishing 33 percent.

The Eurozone foreign ministers have said no more and Greece is expected to default tomorrow when a large debt payment is due that Greece cannot meet. The European Central Bank has also limited its support to the Greek banking system.

The Greek government is under intense pressure. On the one side, its foreign creditors are demanding austerity in exchange for more aid so that Greece can meet its financial obligations. On the other, the Greek population is demanding business (and government largesse) as usual. The government has proposed a referendum on whether to accept austerity.

If Greece goes into default and is kicked out of the Eurozone (to which it should never have been admitted in the first place, of course), it would have huge and immediate consequences for Greece, as all sorts of financial chickens come home to roost. But Greece is a very small country with a population of less than 11 million and a GDP of $204 billion, barely more than 1 percent of U.S. GDP. So the consequences outside of Greece would be limited.

The main problem would be, again, the highly contagious nature of financial fear. If Greece goes, what might happen to Italy, Spain, and Portugal, which also have large debts and dubious credit?

It’s going to be an interesting summer.

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