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3Qs: What’s next for Greece and Europe?

Financial Crisis in Greece - Greek Flag and Flag of European Union

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On Sunday, 61 percent of Greek voters rejected the economic measures European creditors proposed in exchange for the loans Greece needs as part of a rescue plan for the country. Prime Minister Alexis Tsipras had urged Greeks to vote “no” against austerity measures, and reports indicated that the pressure has intensified to restart bailout talks, as Tsipras on Tuesday heads to Brussels to obtain a rescue deal with European leaders.

We asked Mai’a K. Davis Cross, an assistant professor of political science and international affairs and an expert in European politics, to examine the significance of the vote and what’s next for Greece and Europe as a whole.

For Greece, what is the significance of the majority of voters rejecting the austerity measures from the country’s European creditors?

The outcome of the referendum seems to show that the Greek people are tired of dealing with austerity. At the same time, referenda—especially hastily scheduled ones—are notoriously weak at gauging public sentiment and can sometimes even be anti-democratic when citizens do not fully understand what exactly is at stake. The result often hinges on which side campaigns better or gets its message across more convincingly. Sometimes people cast a protest vote, rather than making a choice that actually hinges upon the options in the referendum. In this case, Greek citizens were asked to vote on a bailout package that had already expired, some of the details of which were not even available to the public. If we nonetheless take the “no” vote at face value, we still must consider that Tsipras urged voters to reject the bailout, but not the EU or the common currency. Regardless of the “no” outcome, opinion polls show that most Greeks want to keep the euro, and so we must not conflate this outcome with a referendum on Greek membership in the common currency and the EU.

The ratings agency Fitch said that Greece’s “no” vote increases the risk of a disorderly Greek exit from the eurozone. Do you think we’re headed for Greece to exit and drop the euro, or is a deal with its creditors more likely?

The “no” outcome makes a Greek exit from the eurozone more likely because the country now has no bailout deal, closed banks with little liquidity, and still has to pay back the debt it acquired from years of hidden overspending—with the help of Goldman Sachs—and the 240 billion euros in loans it has received from other eurozone countries to enable it to stay afloat. With the next big payment due date on July 20—when Greece is supposed to pay 3.5 billion euros back to the European Central Bank—the “no” vote has made everything much more dire.  Simply put, the perceived need for Greece to start printing its own currency is higher because the country is in a more precarious position. With the “no” vote, it’s essentially on its own financially.

However, this does not mean that Greece must necessarily go down a path toward exit, which would be infinitely worse for Greece than anything it has experienced thus far in this crisis—citizens’ bank deposits will quickly lose much of their value, inflation will ensue, Greece will become a far less wealthy country, and the degree of austerity its citizens will face will make all that has come before pale in comparison.  The EU and International Monetary Fund never wanted to stop negotiating with Greece, and that door is still open. The challenge will be if Greece and its international creditors can find a mutually acceptable way that allows some room for Greece’s economy to grow—the best way for it to deal with its debt—while still enabling creditors to have confidence that Greek leaders will behave responsibly. Without some sense that Greece is prepared to pay back its loans, it will be hard to justify bailing out other countries in need in the future. Given that EU leaders, Greek leaders, and Greek citizens all want Greece to stay in the euro (and the alternative is far more damaging to Greece’s future), I think a deal with Greece’s creditors is more likely in the weeks ahead. This should entail both less austerity and requirements for Greece to restructure. In the end, this outcome would be much better for Greece, the EU, and the IMF.

Beyond Greece, do you think there are any other long-term implications for Europe?

If Greece charts a path toward recovery and growth, and agrees to a viable deal with its creditors, this crisis will probably make the EU stronger and more resilient over the long term. Just as with the more general eurozone crisis itself, dealing with unprecedented obstacles and challenges to EU integration enables European leaders to put into place better mechanisms for coping with similar challenges in the future.  As evidence of this, the contagion effect from Greece has been nowhere close to as serious for the EU this time around as compared to 2010. The EU and the IMF will likely have to find ways to be more lenient with Greece, to reduce the pressures of austerity and find ways to stimulate the country’s economy, but even this process will provide roadmaps for the future.

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