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Over the edge

3 November 2011 By Edward Hadas

Exactly what George Papandreou had in mind when he announced a referendum on Monday is unknown. The Greek prime minister seems to have told no one in advance and has provided no clear explanation of his motives since. Reckless was about the kindest term used by outsiders to describe a decision that amplified the already severe euro zone crisis.

Papandreou now says he is willing to climb down in return for the opposition party’s endorsement of the latest austerity agreement with the EU. If that happens, the referendum manoeuvre may be classified as a desperate but brilliant political gambit.

The Greek PM is unlikely to benefit personally from the deal now proposed, however. A cross-party transitional government will probably be followed by snap elections and opinion polls suggest Papandreou’s socialist party will lose badly. But he may have decided that was better than the realistic alternatives. He might have been forced to resign in haste. He might have been humiliated in a confidence vote. He could have found himself presiding over a chaotic Greek sovereign default. Electoral defeat looks pretty good in comparison, especially if it comes with a hope of improvements in the country’s governance.

There is much to improve. The government is still far from living within its means and has made few of the structural reforms needed to make the economy healthy. Political bitterness is a major obstacle, but both parties would have lost if a referendum had led to expulsion from the euro zone and EU. That possibility may have focused minds.

If so, great. A unity government is better than a referendum for Greece, the EU and investors. But comfort is likely to be limited and short-lived. The latest deal leaves Greece with a debt burden that may well still be unbearable. Meanwhile the government is not meeting its fiscal targets and the political consensus, such as it is, is fragile. The debt crisis is far from over.

The most distressing aspect of this episode is its cost. Papandreou had to go nuclear to obtain a shaky agreement. The brinkmanship seems to have worked this time, but it is not an experiment anyone would want to see repeated.

 

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