On July 5, Greek citizens decisively voted “no” on a 68-word referendum about whether to accept a proposal from international financial institutions. The proposal involved the creditors extending a bailout program to Greece in exchange for new austerity measures.
The referendum was the culmination of a week of tensions between the Greek government and the creditors, including the International Monetary Fund (IMF), the European Central Bank (ECB), and leading European politicians.
In late June, talks between Greek finance minister Yanis Varoufakis and the creditors stalled when they could not agree on the terms of how to manage Greece’s debt. Varoufakis, representing the left-wing Syriza party led by Prime Minister Alexis Tsipras, pushed for the country’s debt to be restructured and other reforms that would put the country on a pro-growth course.
The creditors, led by German finance minister Wolfgang Schäuble, refused to restructure the debt and insisted on stricter reforms. The proposal from June 25 called for a cut to pensions, a revision of the “wage grid” for public administrators, perennial budget surpluses, and various tax modifications – including an increase in the value-added tax (VAT) from 6 percent to 23 percent for hotels.
Unhappy with the terms of the proposal, yet committed to democracy, PM Tsipras decided to put the measure to Greek voters.
Matters became complicated when the creditors withdrew the proposal on June 28, making the referendum more symbolic than substantive. French President Francois Hollande and Italian PM Matteo Renzi publicly stated that a “no” vote (or “oxi” in Greek) would essentially result in a “Grexit” – Greece’s departure from the 19-member Eurozone.
Pressure mounted on Greece to accept the terms of the deal when the ECB stopped providing emergency liquidity to Greek banks. The next day, the ECB capped its line of credit to €89 billion, most of which had already been used up. On Monday, Greece closed its banks to prevent a bank run, and it limited withdrawals to just €60.
On Tuesday, June 30, Greece missed a €1.5 payment to the IMF and essentially went into default – what the IMF calls “arrears.” That day also marked the expiration of the previous bailout arrangement.
Greece’s debt problem became apparent in 2009, when an audit revealed that the previous right-wing government, led by the New Democracy party, had used accounting gimmicks to mask its deficits. Members of the European Union are supposed to keep their deficits at 3 percent of GDP, but the new Greek government predicted the true figure was closer to 9 percent.
The Greek economy also had other structural factors that left it with heavyfinancial burdens, including generous pensions, an early retirement age, and poor tax collection. Its estimated debt was €270 billion.
In 2010, it accepted a €110 billion loan in exchange for austerity measures. In 2012, it accepted another €130 billion package.
However, many credit the austerity measures for Greece’s faltering economy. The country’s GDP has decreased by 23 percent since the debt crisis began, and one-quarter of the population is unemployed. Since 2011, the suicide rate in the country has increased by 35 percent.
Greece’s membership in the EU has also hamstrung its economic recovery. Since it uses the euro and its monetary policy is made by the ECB, Greece cannot unilaterally deflate its currency to make its exports relatively attractive and stimulate economic activity.
Critics of the austerity blame Greece’s worsening debt on the austerian bailout agreements. Economist Paul Krugman notes that before the debt crisis, Greece’s debt level was near 100 percent of GDP – comparable to other EU governments. Now, that figure is higher than 170 percent of GDP.
It was the fear of more austerity that drove Greeks to reject the proposal on July 5. PM Tsipras and Varoufakis successfully argued that the creditors’ calls for more reform should not be uncoupled from debt relief.
Arguing for a “no” vote, economist Jeffrey Sachs remarked that “a corpse cannot carry out reforms.”
As for now, it looks as though there will be no immediate Grexit.
Minister Varoufakis resigned following the result, noting that the negotiators wanted a more cooperative partner at the table. He hoped that the Greek government would advocate for “an agreement that involves debt restructuring, less austerity, redistribution in favour of the needy, and real reforms.”
This week, European leaders are meeting to resolve what should happen next. German finance minister Schäuble and chancellor Angela Merkel have expressed their desire for Greece to remain in the Eurozone. French finance minister Michel Sapin has said he would consider debt relief as part of a new deal if PM Tsipras offers more “serious” terms.