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OXI or NAI? Greece decides its future

By Dexter Lee 

Policy & Programme Executive, EU Centre in Singapore
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The word “Oxi” (“no” in Greek, pronounced ohi) has a strong symbolic appeal in the hearts and minds of Greeks for decades. Rumour has it that when the Italian fascist dictator Benito Mussolini sent an ultimatum on 28 October 1940 to the then Greek Prime Minister Ioannis Metaxas offering the choice of peaceful occupation or invasion, Metaxas responded with an “oxi”. Italy invaded Greece on the same day while crowds gathered on Athens’ streets to defiantly chant “Oxi! Oxi! Oxi!” Today, the 28 October of each year is celebrated in Greece and Greek communities worldwide as Oxi day.

Fast forward to 2015 and Greeks are now faced with another major crisis. Its elected government has chosen to say “Oxi” to its creditors’ proposals, and called for a referendum to decide on these issues and thus prematurely ending its second bailout program. Capital controls have kicked in, and Athens has defaulted on its debt to the International Monetary Fund (IMF) on 30 June, and is running out of cash. Greeks have now two paths to choose from in the referendum on 5 July: keep austerity measures as a compromise to avoid further defaults and hope for a better deal, or say “Oxi” to Greece’s three main creditors – the IMF, European Commission and European Central Bank (ECB) – so that their country would have the chance of breaking the cycle of austerity and low growth. Saying Oxi” or” Nai” (“yes” in Greek) couldn’t have been more difficult for the Greek electorate.

The roots of the crisis

In January more than a third of the Greek electorate chose SYRIZA, a leftist alliance with strong Eurocommunist roots, to form their new government and to negotiate better terms with its creditors. The SYRIZA party was elected on the promise of ending austerity but remaining in the Eurozone. Hence right from the start, SYRIZA’s charismatic leader Alexis Tsipras and his flamboyant finance minister Yanis Varoufakis have played hardball by rejecting the creditors’ proposals on pension cuts and VAT increases while demanding more flexibility to raise spending and cut revenue hikes, so much so that there is deep mistrust between the Greek government and its creditors. There is some truth to the matter that both men have raised too many hopes and handled negotiations in a sometimes incoherent and illogical manner, but in this current imbroglio it is also important to scrutinise the creditors and their decisions since the beginning of the Eurocrisis.

It is no secret that the financial help to Greece came after decades of bad governance by previous New Democracy and PASOK administrations. Greece had signed up to the Eurozone in 2002 amid domestic problems with tax evasion and corruption. It was also later to have been discovered that Greece “cooked” its figures in order to squeeze into the Eurozone. .  Once it entered the Eurozone, its borrowing costs came down -, Greece turned to financial institutions in Europe for fresh funds in a borrowing binge while it repackaged its debt to would-be buyers abroad. During the good times they had less problems servicing their debts, but when the global financial crisis hit in 2008-9, the extent of Greeks’ indebtedness was revealed. It had no choice but to turn to its European partners for help to service its debts or default. The creditor institutions could have allowed Greece to default in 2010, but chose to extend a financial lifeline to the country. The two bailout packages – €240 billion in total – included the conditions that Athens must privatise government owned businesses, reduce spending and take reforms to encourage business expansion in order for the country to cut its budget deficit and manage its debt.

While there had been signs of a small recovery in late 2014, critics such as Joseph Stiglitz and Paul Krugman have pointed out that the tough austerity measures and strict deadlines in these packages have only worsened the living conditions for ordinary Greeks. Five years on, the IMF has also conceded that austerity has not worked and that Greece needs prolonged and sustainable debt relief.   However, creditors in the EU instead of being  more forthcoming to calls by SYRIZA and other economic experts to forgive some part of the debt and end the tough austerity measures chose also to play hardball, and the ECB themselves placed Greece on economy paralyzing drip-fed emergency funding since the beginning of February.

The referendum and the day(s) after

The referendum on  5 July will be the first for 41 years in Greece. The question here is whether Greeks will vote to accept or reject the proposals presented by its creditors. So far, SYRIZA, its coalition partner the Independent Greeks, and other anti-EU parties such as the Greek Communist Party and the far-right Golden Dawn have backed the “Oxi” or “no” vote. It is expected that New Democracy, To Potami and the PASOK would campaign for the “Nai” or “yes” vote. On Monday, European Commission President Jean-Claude Juncker even made an emotional plea for Greeks to accept the proposals and framed the vote as a choice between the euro and the drachma (Greece’s old currency). His counterparts in other European capitals have and will continue to make such statements in the run-up to the referendum.

It is not exactly clear why Tsipras decided to call a referendum at this stage – some say that this plan was hatched out of desperation, while others believe that this is just part of his strategy to gain more leverage against Brussels and his European counterparts after the bailout expired. He has also surprisingly managed to drive a wedge in the Franco-German axis in a bid to get a deal done before the referendum – while German leaders have blasted Tsipras and Chancellor Angela Merkel has insisted that further negotiations will take place only after Sunday, French President Francois Holland has made a last ditch call  for a resolution to the debt crisis before Sunday’s referendum. This is perhaps due to the strong sympathy that the French left has for their counterparts in Greece.

Regardless of Tsipras’ motives, the referendum has now placed a Herculean task on the Greek people to decide their own future at home and in Europe. They will have to choose whether they reject the already expired proposal and send a message to EU leaders to revaluate their offers to Greece, or if they’d be willing to accept tough austerity measures that Chancellor Merkel has described as “very generous”. These are certainly not easy choices as many Greeks would like to keep the Euro while at the same time continued their support for the anti-austerity message that swept SYRIZA into power.

So far there is no clear indication as to how the results will turn out as opinion polls have not been conclusive. On the one hand SYRIZA continues to enjoy strong support and Tsipras’ approval ratings have remained high since January’s elections. His personal appeal and the mobilising power of his party may help carry the “No” vote across the 50% mark. On the other hand there is a very high chance that the referendum can backfire on Tsipras. With a € 60 withdrawal limit per bankcard and ATMs quickly running out of money Greeks are becoming increasingly angry. Most major Greek media networks are backing the yes vote. Also, having enjoyed the benefits of the single currency for nearly fifteen years it is understandable that many Greeks could heed Juncker’s plea and mark the “yes” box. With both the “yes” and “no” sides expected to attract huge crowds at their rallies over the next few days, the result is likely to be close.

If Greeks vote “yes”, the most likely scenario is that European leaders will resume discussion on the basis of the offer that SYRIZA walked away from on Saturday (27 June). Tsipras has said that he could resign or form a new unity government, something that most European leaders would be happy to see. A “yes” result could also trigger fresh elections in Greece in an already polarised country. But with SYRIZA ahead of all other parties in the opinion polls, the opposition is unlikely to win outright and the leftist alliance would still have a big role to play in any government. A political crisis could ensue and make things difficult for the formation of a new government. In any case, a new Greek government would have less wriggle room to make demands at the beginning, though in the longer term it’s anyone’s guess as to whether they will be able to agree on other issues.

Things would get even more interesting if Greeks vote “no”. Certainly, Tsipras and Varoufakis could return to Brussels emboldened to ask for more concessions or to write a new deal.  At the moment it is not clear whether European leaders would be willing to negotiate further in order to end the crisis and whether the ECB would extend funding to Greece beyond July 20 when Greece has to pay €3.5 billion to redeem its first tranche of bonds from the ECB. Then there is the issue of framing the “yes” vote as an exit from the Eurozone – several commentators have said that this is “legally next to impossible” because there is no such provision in the treaties even should Greece default on its debts in July. Athens could even take its case all the way to the European Court of Justice (ECJ), leading to a lengthy legal battle that would certainly be against the best interests of both sides.

How will things pan out in the long term?

Choosing yes or no is not going to be easy for the Greeks,  and as pointed out by The Economist, “whatever the outcome, the Greek crisis will change the EU for ever”.  At the moment, no one can be fully sure as to how things could pan out and whether both sides can come to an agreement on key fundamental issues. While the crisis has yet to set off any contagion and alarm in China and the US, a prolonged Greek crisis could pose problems for their financial dealings with the European Union in the long run – there is a lot of work to do the morning after the referendum.

A “yes” vote would certainly be a political victory for Eurozone leaders and would vindicate their faith in the single currency, but it should not be seen as an acceptance of the austerity measures as  the way forward in all circumstances –  serious issues such as investments, tax reform, an easing of spending rules, bringing down unemployment and debt restructuring must still be tackled. In short, Greece needs reforms to boost productivity and competitiveness. Only then will it be able to make a slow but steady exit from its recession and the living conditions of its people improve. If the EU chooses to act otherwise and insists that Athens has to stick to their original bailout terms and hence further austerity, Greeks will still enjoy using the Euro but at the crippling cost of taking several decades to repay their country’s debt. They may even turn to Eurosceptic forces if frustrations boil over again.

As mentioned, a “no” could lead to legal battles between a rejuvenated Tsipras administration and the EU over staying in the Eurozone, but possibly at the heavy cost of no funding for Greek banks. That being said, Greece may still find itself with no other viable option but to voluntarily leave the Eurozone. Returning to the drachma may lead to more short-term economic pain for Greeks, but at the same time with full control of its monetary policy there might still be a chance for economic recovery.  Last but not least, an “Oxi” may have other consequences for the political developments in Europe. By saying “no” on July 5, the Greeks would almost certainly inspire other leftist movements such as Podemos – which is tipped to form the next government of Spain – to push the European Union for even more concessions. If that happens, politics in the EU would become even more polarised pitting the liberals against the lefts and the Eurosceptics.