Sunday’s bailout referendum in Greece produced a result that few had predicted.
Polls in the days leading up to the referendum had suggested that the vote would be close, and perhaps that a 'yes' vote to the latest agreement offered by the troika – the three organisations providing emergency bailout funds to the Greek government – would prevail. But on the day, 'no' (oxi, in Greek) won in a landslide, with around 61 per cent of the vote.
How Did We Get Here?
There are many factors at play in Greece's economic crisis of the last five years, but the basic problem is that Greece cannot pay back its debts under the austerity policies demanded by the troika. These policies, consisting of large spending cuts and tax increases, cuts to minimum wages, and privatisations of government services, have led to Greece's current economic situation, in which over 25 per cent of the workforce is unemployed, and living standards have fallen by almost a quarter.
The ongoing bailout of the Greek economy has been contingent on the implementation of austerity policies, but these very policies have made Greece's debt burden unsustainable because they have caused the country’s huge economic contraction since 2010. Indeed, during the referendum campaign last week, the International Monetary Fund (IMF), one of the troika organisations that has championed austerity from the beginning, released a report acknowledging that the only way forward was for a substantial amount of Greece's debt to be excused.
What Will The Result Mean In The Coming Days?
Sunday's vote strengthens the position of Greece's governing leftist party Syriza, led by Prime Minister Alexis Tsipras. Syriza was elected on an explicitly anti-austerity platform, though since the election in January the party has backed down on issues like pension and minimum wage cuts that it had previously said were non-negotiable. But the resounding nature of the referendum result should give the government confidence to pursue a more ardent anti-austerity line in debt negotiations with the troika: the IMF, the European Commission and the European Central Bank (ECB).
In another significant development on Monday, however, Greek Finance Minister Yanis Varoufakis resigned, possibly signalling a more conciliatory approach to the negotiations.
Varoufakis labelled the troika 'terrorists' last week after European leaders urged Greeks to vote 'yes' in the referendum, and the ECB's withdrawal of emergency loans forced the Greek government to put a €60 limit on bank withdrawals.
Perhaps the most pressing issue at stake in the coming days is whether the ECB will increase 'Emergency Liquidity Assistance' (ELA), which would allow the Greek government to lift its capital controls, including the limit on bank withdrawals.
On Monday the ECB decided to maintain the current level of ELA, but it has made accessing the funds more difficult for Greek banks and seemingly reserved the right to cut ELA off altogether if debt talks this week don't result in a deal.
Greece is now literally running out of cash, to the extent that the €60 ATM withdrawal limit is fast becoming a €50 limit as banks run out of €20 notes. The ECB could decide not to reinstate ELA, but to do so would be even more politically charged than the decision to initially suspend the funds after Tsipras called the referendum, and would bring Greece even closer to defaulting and crashing out of the Eurozone.
Why Won't The Troika Back Down On Austerity?
Despite the vindication of Sunday's 'no' vote, it will still be an uphill battle for Syriza to negotiate a deal acceptable to the Greek public. The troika and elites in northern Europe will be determined to continue austerity, because to make concessions for Greece would mean large losses for European banks, potentially leading to similar concessions for other debt ravaged countries like Spain, Portugal and Italy, which have growing anti-austerity movements.
This presents a dilemma for Syriza. The next logical step for Greece, if it cannot reach an acceptable deal on scaling back austerity, would be to default on its debts, exit the Eurozone, and return to the old Greek currency, the drachma.
This would lead to a large depreciation of the drachma, which would provide a boost to Greece's biggest industries like tourism and shipping. A default would also allow the government to pursue more pro-growth budgetary policies. Paul Krugman and a number of other economists are now making the case for an exit.
But the catch is that Greeks overwhelmingly support staying in the Eurozone, and indeed Tsipras campaigned for 'no' in the referendum pledging to stick with the European common currency. In a sense, then, the referendum just marks the latest episode in the ongoing brinkmanship between Greece and the troika; neither wants to be held responsible for a Greek exit ('Grexit'), but both have an incentive to escalate the crisis in an attempt to extract concessions.
Both sides have a lot to lose from Greece leaving the Eurozone. For the troika and German Chancellor Angela Merkel, presiding over a full-scale breakup of the Eurozone is unconscionable. For Syriza, an exit has seemed electorally unviable, and would devastate the Greek economy in the short-run.
But the referendum on Sunday likely served a dual purpose for Syriza and Tsipras. It was undoubtedly intended to strengthen the government's hand in negotiations with the troika, but one senses that it was also about galvanising anti-austerity forces and support for the government in the likely event that Greece again doesn't get the debt relief and easing of austerity that it needs.
In that case, the next step will be Grexit, and Syriza will have to hope that support for staying in the Euro wanes, and anti-austerity sentiment remains strong in Greek civil society.