John Sfakianakis* Sunday's referendum is set to be a decisive stage of the Greek crisis. A “Yes” vote would potentially allow for a better deal than would have been achievable before. For the banks to reopen, an agreement with Greece's creditors would need to come first. Regaining credibility with Brussels, Berlin and Washington is paramount as five months have been squandered and trust has been lost. In case of a ”No” vote in the referendum, the creditors will reject any further deal with near certainty and the only outcomes are a systemic crisis that would lead to Greece's return to a newly minted national currency. Over the last five years Greece had uncritically introduced the harshest austerity program in modern history that has given it the Olympic record of the longest and deepest recession in recent memory. Unlike the global financial crisis in 2008 and the subsequent crises in Iceland, Ireland and Spain that had their origins in the unpredictable results of malfunctioning markets (financial, banking, real estate and so on), the Greek crisis was the predictable result of the reckless spending (and cronyism) of profligate governments. When democracy was restored in 1974, government debt to GDP was 18%. By 2009 a two-party political system (Conservatives versus Socialists) had brought the debt to 130%, far beyond the conventional benchmark of 80% that is considered (barely) serviceable in modern economies. In plain English, Greek governments had borrowed too much and bankrupted the state. But borrowing cannot increase unless someone is prepared to lend more. Those who had lent to Greece were mainly private investors – consisting primarily of French and German banks that had enjoyed high returns to their investments in Greek government bonds assuming that there could not be a sovereign default in the euro zone. The euro was rescued. But Greece was subjected to the most botched structural adjustment program since the 1980s. It resulted in a reduction in disposable incomes by nearly 40% and an increase in youth unemployment to more than 65%. Paradoxically, public debt has increased to €320 billion (from €299 billion in 2009) despite the fact that Greece received directly and indirectly €350 billion – an impossibility for a mathematician but reality in economics when closing the gap between revenues and expenditures ignores the adverse effect of too much austerity on economic growth. Three Nobel laureates, Paul Krugman, Joseph Stiglitz and Chris Pissarides, have criticized from the beginning the ill-founded Greek adjustment program and that the euro zone needs to address for good the incoherence created between its common monetary policy and the independent fiscal policies pursued by each of its member states. Both Greece's creditors and Greek policy makers have made serious blunders. It is now time to adopt a new strategy, introducing reforms that lead to growth within Greece. There is no time for false political promises that divides the social fabric and lead to an impasse. Unity has to be maintained and a national coalition is the only way forward. At this juncture, there are no quick fixes even if there is a Yes vote. Those Greeks technocrats who are not politically tainted from the diaspora as well as those found inside the country have to be given a real chance to form a core of any future government of national unity. The future of Greece is firmly within the eurozone and the European Union. An exit from the eurozone would force the country to become effectively a developing poor economy and lose another 50% of its GDP. Geopolitically it would place the country firmly in the camp of the insecure. Greece needs its own new life arising from the ashes of its predecessor, just like the ancient Greek phoenix. * The writer is a Greek economist based in Riyadh
