For the next month, Johan Van Overtveldt, author of the new Agate B2 title The End of the Euro: The Uneasy Future of the European Union, will be blogging here twice weekly about the ongoing travails of the European monetary union as it deals with the Greek debt crisis and the wider unease affecting many European economies. Today’s first post deals with the Greek prime minister’s proposal for a national referendum on the Eurozone’s proposed bailout terms for Greece.
The Greek prime minister George Papandreou has proposed a referendum on the bailout package negotiated for his country during the Eurozone leaders’ summit on October 26 and 27. The agreed-upon bailout consists of two basic elements: First, private bondholders will have to accept a 50 percent haircut on their holdings of Greek bonds. Second, in return for more cash from the Eurozone’s stability fund (EFSF) and from the IMF, the Greek government must go further down the austerity road with new taxes and expenditure cuts.
The other European leaders showed great surprise at Papandreou’s referendum proposal. Well, they shouldn’t; Greece is simply desperate. As I argue in The End of the Euro, Greece finds itself in a totally hopeless situation. The latest data show Greece’s economy contracting at 8 percent on annual basis, unemployment rising above 20 percent, and a budget situation that’s out of control. The Greek budget deficit is estimated to be something like 10 percent of GDP; government debt stands at 160 percent of GDP and is rising rapidly. The desperate measures necessary to cut the Greek deficit will just worsen Greece’s depression in the short and medium term.
No country has ever escaped from a situation like the one facing Greece without a massive devaluation of its currency. This devaluation is necessary to restore the international competitiveness of the Greek corporate sector. Per definition, a Greek devaluation can only happen if Greece leaves the Eurozone and reintroduces a new drachma. George Papandreou is asking his people for a mandate to do just that. Can the European monetary union survive a Greek exit? Unlikely.