Greece can have its referendum

3-11-2011 | Economic news

The euphoria following the decisive EU summit in late October lasted two days. That was twice as long as the jubilation after the July EU summit that was also hailed as decisive. I detect an upward line and that is good news. I am clearly an eternal optimist.

This time Greek Prime Minister Papandreou decided to totally ruin the party. His call for a Greek referendum on the outcome of the latest EU summit sent financial markets into deep red territory. The reactions from political circles were also unanimously furious. Papandreou has now completely lost any of the political capital he still had in Europe.

The sword of Damocles

But there is still an upside to Papandreou’s statement. He has made it clear to us in a dumb and hard-handed way that it is impossible to do business with the Greek government. There is precious little support for his policy among the Greek population. The referendum he has clumsily pulled out of a hat like a rabbit was bound to come sooner or later anyway. It would, however, come in the form of the next elections. There is a very real chance that we will first muddle on with Greece for a while, pump more money into the country and swallow the related damage to the euro, only to be rejected by the Greeks in a couple of years when they vote en masse for a local populist party. Studies carried out some time ago by institutes including the Organisation for Economic Co-operation and Development already showed that Greece scored a failing grade on every indicator of economic strength. Unlike Ireland, which is emerging from the current crisis largely on its own volition with a bit of help from Europe, the odds of Greece doing the same are negligible. The country will need many, many years of European aid before it can put its house in order. And the prospect that Greece might still throw in the towel at some point in the years ahead will constantly hang above the market like the sword of Damocles, which is another Greek invention.

The referendum

So if you ask me: bring on the referendum. The sooner, the better. Let Greek voters take a stance. But ensure their decision is based on the right question. So the referendum must not be on the details of the summit in late October, but on EU membership. If a majority of Greek voters say ‘yes’ to EU membership, then it will be time for them to stop striking and get down to work. And the opposition must then also have the guts to commit to the outcome of the summit in advance. But if the referendum renders a ‘no’ vote, then that is the end of the story.

Greece will then exit the euro, which will clearly not be an orderly parting of ways. It will be paired with the related damage for Europe. In response Europe will consequently have to deal mercilessly with this unreliable member state. So no euro will mean no structural funds, no internal market, no Schengen, none of it. And there will obviously be no preferential trade terms and absolutely no aid. The country must be treated like a pariah in order to make it instantly clear to every other member state that such behaviour is unacceptable to Europe.

The second scenario would naturally be devastating for the Greek population. That’s why they can choose what they want. So let the referendum take place, the sooner, the better. Because it is bound to happen at some point anyway.