Panic Move or Call for Democracy?

Referendology 101: Weighing the Referendum in Greece

Greece is facing a pivotal July 5 referendum that may ultimately decide its future in the European Union.

Despite already tepid progress and lingering negotiations that left even the biggest optimists scratching their heads, the Greek government abruptly left the negotiating table to call a referendum on July 5, 2015, to decide its ultimate fate.

To be fair, neither the Eurogroup creditors nor the Greek government, spearheaded by the duo of Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, were anywhere near an accord leaving each side seemingly out of time. While details surrounding the cessation of negotiations are a matter of contestation between the creditors and Mr. Tsipras, the decision has left Eurogroup leaders enraged and exasperated – the latest setback after months of talks to avert a Greek default.

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All Eyes on the Referendum

Last week, markets and leaders were buoyed by optimism when Mr. Tsipras submitted a proposal to Eurogroup creditors that helped bring the sides back to the table. The proposal, however, was rejected on the basis of a lack of structural reforms and an over reliance on tax edicts – Greek tax collection has long been an Achilles heel facing the government, a feeling unanimously shared by Eurogroup leaders.

With the passage of the June 30 date and subsequent default to the International Monetary Fund (IMF) all but certain, Eurogroup creditors, Greeks, and markets will collectively eye the July 5 referendum with salient interest. While not unheard of in Greece – the country voted in a referendum back in 1974, ushering in a republic – the latest referendum threatens to plunge the country into a state of upheaval, pressing the reset button on five years of austerity.

The referendum itself will see Greek citizens voting on a number of points, relegated to a not-so-simple ‘yes’ or ‘no’ vote, potentially resulting in either a deal with Eurogroup creditors, or a path down a road that the European Union (EU) has never dealt with before. According to a recently released statement from the European Commission, Greek voters will grapple a 10-point comprehensive plan to approve or deny bailout conditions. Voters were also given a plan by the Tsipras-led Syriza government, stating their respective case as well.

The European Commission plan, published in both English and Greek, includes sales tax measures and labor market reforms, along with a pension overhaul, which proved to be a sticking point and red line for negotiations between the two sides over the past month. More specifically, the plan urges Greek authorities to initiate a 2010 pension law via cuts in 2015.

In addition to pensions, which are by far the greatest point of emphasis on either side, the plan calls for a number of reforms to public wages, tax collection and corporate taxation. Targets of primary surplus as percentage of Gross Domestic Product (GDP) were also subsequently lowered from previous iterations to 1% in 2015, 2% in 2016, 3% in 2017, and 3.5% in 2018.

The remainder of the plan focuses on VAT rates, including a uniform state of 23% and a reduced 13% rate for provisions of food and energy. Finally, the plan calls for the abolishment of discounts on Greek islands, with specific regard to limiting early retirement and a number of tax concessions currently enjoyed.

Overall, the referendum throws an already delicate situation into a state of disarray, with both Eurogroup creditors and the Greek government digging in. The decision to launch a referendum also presents several interesting points, each of which yield some positives and negatives.

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The Good

Many Greeks pointed to the initial entrance of their country into the Eurozone as a grave error. Should the country ultimately be steered down a path that leads it out of the European Union, it will be instigated by a collective vote from the Greek people.

Greek voters will in essence be in control of their own destiny on July 5, which will empower them to decide on the most pressing of matters facing their country over the past five years. The decision by Mr. Tsipras to relinquish the burden of negotiations and pass it on to Greek voters ultimately will transmit the most transparent and uniform view in the minds of the Greek population. Despite opposing viewpoints between Mr. Tsipras and the Eurogroup, Greeks will have a lot to mull over the next six days – i.e. the continuation of austerity reforms or a schism from them entirely.

Regardless of the outcome, the Greek government has pledged to endorse and respect the final decision of voters, which will either open up a new chapter of European history, or bring Greece back into the European fold.

The Bad

The idea of a referendum is hardly a novel concept, with countries such as the United Kingdom holding their own in over a year from now to decide on EU membership. However, time is the operative emphasis in this statement, and Greece is simply out of it. The decision to launch a referendum at this stage of the game has put an unrelenting burden on Greek finances and its Central Bank, which as recently as last week had made public calls for emergency measures in the absence of a deal.

Additionally, the decision to hold a referendum is not one that was taken lightly, and despite its small size, the archipelago nation holds a number of logistical difficulties in terms of voting, namely with such a time sensitive verdict. With state coffers all but bankrupt and an IMF default staring Greece in the face, the timing of the referendum seems to be more of a snap decision, rather than an opportunity for democracy, as championed by Mr. Tsipras. Regardless, a bailout extension was summarily denied by Eurogroup creditors.

At the end of the day, the choice of relying on a referendum belonged to Greece, a decision Mr. Tsipras made with much alacrity after repeated attempts he felt by the Eurogroup to placate his country. However, with the clock nearly striking midnight and almost a week still remaining until the referendum, the inherent lag in the decision-making could ultimately prove to be Greece’s undoing.

The Ugly

Nothing spreads quicker than panic, and in the case of beleaguered Greek finances, the panic reached a boiling point this weekend, culminating in droves of Greeks retrieving their money from ATMs before the money dried up. According to a Bloomberg statement, as of Saturday morning roughly 93% of ATMs were still supplying money, a figure that dropped to 40% by late Sunday night.

As a result, the Greek government imposed a series of capital controls, preventing the further outflow of euro notes from banks. The measures, along with the closure of banks, which are slated to remain so until at least the July 5 referendum, call for a mitigation of withdrawals as low as €60 ($66) per day. The decision to impose capital controls, while not universally backed, was ultimately a move done out of necessity, given the rampant exodus of liquidity from Greek banks.

Perhaps more worryingly is the six-day lag between the July 5 referendum and the imposition of capital controls. With emergency liquidity measures from the European Union unable to stem the tide of capital flight, the Greek government will attempt to survive for nearly a week without the means to support itself. This will in all likelihood include an IMF default at month’s end (June 30), further eroding confidence in Greece, and triggering a number of scenarios for the embattled country.

Thus, the question is not whether Greece survives until its July 5 referendum date – most assuredly the country will still be found on a map, with tourism likely unabated. However, the state of the country by then, regardless of the referendum outcome, may prove to be more than Greeks can bear. The latest polls show that the majority of Greeks still favor union with Europe, though all eyes will be on the July 5 date that may be making history.

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