Papandreou’s call for a referendum on the bailout shocked and angered other Eurozone leaders as it brought uncertainty back to markets as the prospect of what has been termed a ‘disorderly default’ loomed. It was perhaps understandable, given Papandreou’s weak position, that he was reluctant to take responsibility for the bailout decision and the unpopular austerity measures that would follow.
In further talks last night Merkel and Sarkozy have made it plain that no further aid will be handed over to Greece until after the referendum. It has also been spelled out, if it was not already clear, that the referendum is in reality about Greece’s membership of the Eurozone.
The timing of the proposed referendum has been accelerated as Papandreou is now proposing to hold it as early as 4th December. However, he is facing revolt in his own party and from his Finance Minister, Venizelos, who is opposed to the referendum. The immediate question is whether Papandreou can survive a confidence vote in the Greek parliament tomorrow and whether, with members of his party calling for a national unity government or an early election, he can garner enough support to pass a bill for the referendum to be held. Nervous markets are responding to the possibility that the referendum will not go ahead and that the agreed bailout package will be accepted.
European banks are heavily exposed to Greek debt as well as to Italian, Spanish and other Eurozone sovereign debt. The risk of Greece defaulting is that the contagion spreads. This is already reflected, for example in the rise in yields on Italian debt despite intervention from the European Central Bank. The higher cost of government borrowing adds to the pressure on highly indebted states and, along with slow economic growth, makes it harder to balance the books and start reducing the burden of debt. Default in one of the Eurozone’s larger economies would have a huge impact on European banks, and governments, and set back any return to normal growth. This would reverberate around the globe because of the importance of the European market to exporters including, of course, the UK.
There is perhaps an increased likelihood that the Greek bailout will now progress without the wait for a risky referendum. But this could be a sticking plaster solution. In the longer term, the Euro is surely not sustainable. The arguments that existed when it was first introduced still remain and have recently been exposed for all to see: a common currency can work only with further political integration and with centralised controls over budgetary policy. Germany differs economically and culturally from the weaker states in the Eurozone, the PIIGS – Portugal, Ireland, Italy, Greece & Spain. Is it likely that the German taxpayer will want to go on subsidising the rest of the Eurozone? Is it likely that voters in the weaker states will want to lose control of tax and spending to a centralised European institution in which Germany has the greatest influence? After all, he who pays the piper calls the tune!