Greece Rejects European Austerity

Greek voters rejected European austerity. It could lead to Athens being left out of the eurozone.


Ignoring the demands of their European partners and heeding the call of their prime minister, Alexis Tsipras, Greek voters rejected austerity demands Sunday, a vote that could bring the nation out of the eurozone and could signal the beginning of the end of modern Europe.

Early returns show 61 percent of Greek voters said “no” to the question asking whether they would accept spending cuts Europe says are necessary to continue a five-year, $270 billion bailout package. Last week, Greece missed a $1.7 billion payment to the International Monetary Fund. The IMF, the European Central Bank, and the European Commission had extended to Greece a financial lifeline as it teeters on the precipice of bankruptcy. Athens is now in default to the IMF and owes the European Central Bank a payment of 6.7 billion euros, or $7.5 billion, in two weeks.

The “no” vote gives Tsipras his desired result. He believes it bolsters his negotiating position with European leaders. But in the lead-up to the Greek referendum, it appeared as if Europe was readying for the possibility of Greece leaving the economic union it joined in 2001.

German Chancellor Angela Merkel has acknowledged that allowing Greece to adopt the euro was a mistake. Tsipras vowed to abandon his post if Greeks voted to accept European financial reforms.

Now, the future of the European Union is in doubt. Greece could leave the euro, which would devastate its own economy and have far-reaching implications for Europe and global markets. Europeans could blink — and cave to Greek demands.

“The dominating logic was that integration is a one-way street. There’s no opt-out option,” Olaf Boehnke, head of the European Council on Foreign Relations Berlin office, told Foreign Policy. He said this is no longer the case.

The world will be watching as Merkel travels to France Monday to meet with French President François Hollande to discuss the crisis. Representatives of Tsipras’s far-left Syriza party are also on their way to Brussels to relaunch negotiations. Gabriel Sakellaridis, a Syriza spokesperson, said on Greek television Sunday evening that a deal with Europe to pay back what it owes in exchange for bailout funds needs to happen in the next two days.

“The mandate from the Greek people is for the government to defend its own proposal and its own positions,” Sakellaridis said. “The real negotiations must start from tonight.”

Without help, Greek banks are likely to fold. It’s not clear whether they will reopen for business Monday after being shut down last weekend amidst fears of a bank run. The Greek stock market has also been closed.

The endgame started last weekend, when the European Central Bank cut off an emergency line of credit to Greek banks after officials there acknowledged they would go into default to the IMF. Daily cash withdrawals are now limited to 60 euros, or about $67. Greek pensioners stormed banks Wednesday to collect a maximum of 120 euros, or $134. ATMs across the Mediterranean nation are now empty.

Late Sunday, the Greek central bank asked its European counterpart for emergency liquidity assistance.

Tsipras asked for a last-second bailout late last Monday evening, the night before the deadline to pay back the IMF. European officials, led by Germany, rejected his request.

The referendum is the culmination of a five-year struggle to keep Greece a member of the European monetary union. It began in 2010, when the Greek government admitted it had cooked its books to make it appear as if it was meeting minimum European budget requirements.

At the start of the crisis, the Grexit — Greece leaving the eurozone — was unthinkable. It would have crippled the world economy, already on life support after the 2008 collapse of Lehman Brothers. Both European and American banks held hundreds of billions of dollars in Greek debt. Declaring those bonds worthless would have further decimated these financial institutions which, at the time, were still struggling to overcome the rapid decline of the American housing market.

Now, American banks have limited their exposure to the possibility of Greece leaving Europe. European banks also claim they are safe, although no one knows what will happen to financial markets if a country leaves the European monetary union.

Last Monday, when it became clear Greece would miss the IMF payment, the Dow Jones Industrial Average dropped 350 points, the biggest decline of the year.

Ahead of Sunday’s vote, German officials, who have been holding a hard-line with Athens to accept reforms to its bloated pension system on top of new taxes on Greek businesses and its wealthy population, appeared to soften. Germany’s finance minister, Wolfgang Schäuble, who insisted all of last week that a “no” vote would represent a vote to leave Europe, said this weekend that was not necessarily the case.

Schäuble’s conciliatory comments were in stark contrast to those of his Greek counterpart, Yanis Varoufakis. In an interview with the Spanish daily El Mundo, he said European demands on Greece amounted to acts of terrorism.

“Why did they force us to close the banks?” he asked. “To instill fear in people. And spreading fear is called terrorism.”

Varoufakis’s comments reflect the poisoned environment between Greek officials and the rest of Europe. For years, the two sides have been trading vicious barbs over who is responsible for the crisis. Germans accused Greeks of being lazy. In turn, Greek officials called the Germans Nazis, condemned German banks for irresponsible lending to Athens, and demanded reparations from the second world war.

Now, with Greece on the verge leaving the eurozone, there are growing questions about whether the European Union, created to promote stability and peace after World War II, can survive.

Similar financial crises loom in Spain, Italy, and Portugal, countries that also provided misleading information about the state of their finances to hide structural economic deficiencies. And even though Great Britain isn’t a member of the European monetary club, it is also considering leaving the European Union. Next year, Britain will hold its own referendum on whether to abandon its European partners.

The Greek crisis “has overshadowed what we wanted to be a clear starting gun to the European reform,” a British diplomat told Foreign Policy recently. “We want to be a competitive and open economy and a valued partner to the United States.”

The standoff has severe geopolitical implications. Russian officials have hinted they would be willing to lend Greece a financial lifeline, something that could disrupt European unity on financial sanctions for Russian President Vladimir Putin’s actions in Ukraine. China has also been mentioned as a possible Greek savior.

Washington has largely been relegated to the sidelines as the Greek crisis comes to its conclusion. President Barack Obama and Treasury Secretary Jack Lew have sided with Merkel and Hollande, urging Greece to accept European austerity demands.

But as Sunday’s referendum shows, those calls have fallen on deaf ears. Greek voters did as Tsipras wanted and stood firm in the face of European demands. Their vote could signify the end of Europe as the modern world knows it.

Photo credit: Christopher Furlong/Getty Images

David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis

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