Here’s what you need to know about the referendum in Greece.
On Sunday July 5, the people of Greece have voted whether they want to stay in the Eurozone or not. If the results on Tuesday’s counting are “yes,” they agree to stay, if the results on Tuesday’s counting are “no” means other wise. As of now the exit polls show that a majority want No.
A yes would have meant they agree to conditions imposed by their lenders – have more taxes, less pension and less subsidies. A lot of Greeks have got accustomed to lower prices and easy living because of subsidy. They obviously don’t want to pay more tax and receive have less money from their government to spend. So a lot of them don’t want to stay in the Eurozone.
Unfortunately the present Prime Minister Tsipras wants to exit the Eurozone. Greece’s governments including the current one have been borrowing money from the rest of the world to give these subsidies to its people. It is believed that Greek economy will be in a bigger turmoil and ultimately head towards total bankruptcy.
Role of the IMF, European Union and European Central Bank
These three institutions (collectively known as “the Troika”) are the biggest lenders.
The total amount owed by Greece the rest of the world is $360 billion. More than their annual GDP.
On June 25 the Troika offered to provide Greece with desperately needed money. In exchange, the Troika demanded that Greece implement a list of reforms; tax increases, spending cuts, and economic reforms. This deal was to be accepted before June 30. It wasn’t.
However the Parliament scheduled the referendum on July 5, well after the June 30 deadline. Which means that they are bad debtors, they refuse to take deadlines, and they will decide what do, when to do. They will decide the terms and conditions.
As of June 30, Greece has been declared bankrupt as they did not pay their instalment to the IMF.
Eurozone leaders don’t like the idea of the disruption that would result from Greece leaving the Eurozone, so if the Greek people vote yes, the lenders i.e the Troika puts the offer back on the table. They have no option. The creditors and the European Union are waiting for the referendum. A “yes” vote on July 5, would mean that the Greek people want to remain in the Eurozone even if it means accepting the demands of the Troika. If they choose this option, they get another large amount of money as bailout.
However, exactly what the referendum means, and what will happen as a result of the vote?
The referendum was unilaterally scheduled by the Greek Parliament, there’s no guarantee that European governments will treat it as binding. And the Greek government has to pay the lenders even in a yes or a no decision.
Greece owes them money and they will have nothing left in their banks to import anything – from oils and gas and food. First their banks shut down and then slowly every thing else.
The Greek government is as irresponsible as any governments can be. They are confusing their population with a lot of negotiations so that the people are not clear about what they are voting for.
Exactly what would happen in a 3rd world country when governments have no answer – they try to confuse people.
If the result of the referendum is No:
They feel they will have more control over their destiny. How?
They can form their own currency. They do not need Euros to buy anything. The government can issue IOUs, with which they can buy and sell within the country. So they become independent. Actually this is the way a rogue government tells its people “They don’t give us, we don’t need their Euros. We will print our own IOUs”
Government will start paying domestic expenses with IOUs instead of Euros. These IOUs would function as a second currency, circulating alongside Euros in the Greek economy, but worthless outside of Greece. In theory, this could provide the Greek economy with much-needed liquidity without Greece formally leaving the Eurozone. However no one outside Greece will recognise the IOU. So they may not import anything with these worthless IOUs.
In practice, however, this would likely just be the first step toward leaving the Eurozone. Anyone who has a choice in the matter would insist on being paid in Euros instead of IOUs, so Euros would gradually leak out of the Greek economy. The Greek government would be forced to print more and more IOUs, until they became the country’s de facto currency. And while the government might declare them to have equal value to euros, the market is unlikely to agree.
Eventually, Greece might be forced to return to its old currency, the drachma.
What happens to their Prime Minister and his government?
Big complication that comes with a “yes” vote: the Tsipras government will fall. While European leaders might be willing to still offer the deal with Greece, they probably won’t be favourably inclined to negotiate with a man who denounced their previous offer and urged his people to vote against it. And Tsipras might also face a revolt from members of his far-left Syriza Party if he tries to accept the deal. Opposition to this kind of deal was the issue that swept the party into power.
So a “yes” vote could trigger new elections, creating more weeks of uncertainty in Greece.
Would leaving the Euro be bad for Greece?
Leaving the euro would be a disaster for Greece. Leaving the euro would also create some serious headaches for Greek policymakers. Right now, most contracts in Greece are denominated in euros. Re-writing those contracts in drachmas would spark years of litigation. And abandoning euros would mean the Greeks would pay higher interest rates for years to come.
Yet leaving the Euro could also have long-term benefits. For the last few years, Greece has been suffering economic conditions as bad as America’s Great Depression, and the tight monetary policy of the European Central Bank deserves much of the blame. By creating its own currency, Greece would ensure that its leaders have a greater ability to respond next time Greece suffers an economic downturn.
What Greece really needs
Would accepting the Troika’s offer be good for Greece? Many of the reform ideas in the Troika proposal would actually be good for Greece. Greece has a corrupt and dysfunctional tax system badly in need of improvement. Its civil service is corrupt. Sounds familiar?
A more efficient tax system and a more competent civil service would greatly improve the finances of the Greek government. But these are systematic problems that are difficult to solve even if Greek leaders want to solve them. So in practice, accepting the Troika’s offer could lead to more antagonism between Greece and the rest of Europe, more economic crises, and a perpetuation of the severe Greek recession. More poverty and depression.
Is this a crisis for the entire Eurozone?
Yes. Spain and Portugal are other countries that have big debts. They may also decide to leave the Eurozone as an easy way out even if for short term gains. This will certainly cascade into a crisis that challenges the entire concept of a United Europe.
Source courtesy: Vox.com: Policy and Politics
Pic courtesy: Vox.com