End of the euro, Tuesday edition

Greece's PASOK (Socialist) Party Prime Minister George Papandreou (Γεώργιος Παπανδρέου) just did the first thing of his current stint as Prime Minister that seems really constructive to me. He's called for a national referendum on whether his own people want to accept the latest proposal from the EU from dealing with the debt crisis.

Robert Reich helpfully defines the choices like this (Greek's Choice — and Ours: Democracy or Finance? 11/01/2011):

If Greeks accept the bailout terms, unemployment will rise even further in Greece, public services will be cut more than they have already, the Greek economy will contract, and the standard of living of most Greeks will deteriorate further.

If Greeks reject the terms and the nation defaults, it will face far higher borrowing costs in the future. This may reduce the standard of living of most Greeks, too. But it doesn't have to. Without the austerity measures the rest of Europe and the IMF are demanding, the Greek economy has a better chance of growing and more Greeks are likely to find jobs.

As of this writing, the referendum hasn't yet been scheduled but would be expected early in 2012. There may be less than meets the eye here. There referendum could be phrased very vaguely, e.g., do you think Greece to stay in the EU and the eurozone?

Papandreou is also seeking a vote of confidence soon in Parliament. His government currently has a three-vote margin and it's entirely possible that a confidence vote would fail. This would presumably lead to something like a national unity government of some kind.

I don't pretend to be particularly familiar with Greek politics. But this looks to me like a reluctant realization on the part of Papandreou and PASOK that there is a dangerous democratic disconnect between the Greek government and the people over the austerity vice the EU is applying to Greece. I haven't seen any indication that Papandreou is trying to torpedo this deal this way. He's been willing so far to do the bidding of the EU Council and the banks whose interest they are primarily defending in their seemingly never-ending succession of solutions to the eurozone debt problems.

But he has to know there's a big chance any referendum will fail. As Athens News reports in Papandreou calls referendum on Brussels deal 10/31/2011, "Nearly 60 percent of Greeks view the EU summit agreement of October 27 on the new bailout package as negative or probably negative, a survey showed on Saturday."

Interestingly enough, a loss of confidence by the bond vigilantes that Greece will go along with the latest bandit's deal may lead to Italy leaving the eurozone before Greece. Reich explains it this way:

... if Greek defaults on its loans, global investors (fearing that a default in Greece sets a dangerous precedent) may yank their money out of Italy. This would almost certainly bust several big European banks – and generate panic on Wall Street. That's why Tim Geithner has been pressing Europe to bail out Greece.

Paul Krugman in Eurodämmerung 11/01/2011:

The question I’m trying to answer right now is how the final act will be played. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France.

It all sounds apocalyptic and unreal. But how is this situation supposed to resolve itself? The only route I see to avoid something like this involves the ECB totally changing its spots, fast.

Tags: eu, euro, european union