Belmont Club


Beware of Greeks returning gifts. This could be the moral of a new Eurozone crisis caused by Prime Minister George Papandreou’s decision to call a referendum on the proposed bailout package for that country. The fear in Brussels is that the Greeks will reject the austerity measures that come with it, leading to a ‘disorderly’ default and bringing financial Armageddon in its wake.

The move also opened a rift within Greece’s ruling Socialist party, threatening the government’s survival after one lawmaker resigned from the party in disagreement with the referendum while a senior party member called for early elections.

The Greek government was holding an emergency cabinet meeting late Tuesday ahead of a parliamentary debate on a vote of confidence for the government that would start Wednesday and end with a vote Friday.

Papandreou announced late Monday a surprise referendum on Greece’s bailout program, in a high-stakes gamble aimed at quelling a public backlash against controversial austerity policies but at the risk of derailing plans aimed at solving the euro zone’s debt crisis.

His decision came just days after European leaders in Brussels agreed on a set of measures to reduce Greece’s debt burden and beef up the firepower of a rescue fund to make sure the continent is capable of supporting other troubled euro-zone nations. As part of the plan, the European leaders also agreed to reinforce their banks by requesting they add to their capital reserves.

Fears that the EU plan could unravel if rejected at a Greek referendum rattled financial markets, with stocks and the euro plunging, while 10-year Italian bond yields rose perilously close to their highest levels since the inception of the euro.

Meanwhile, Greece’s euro-zone partners were slow to respond, appearing unprepared and stunned by the developments.

Brussels is learning the hard way that it is easier to give away entitlements than it is to take them back. It is like unscrambling an egg. Angela Merkel, who recently remarked that Greece needed “permanent supervision” to make them behave contrary to their natures, may have anticipated how difficult it would be.

Investors are taking comfort where they may. The Globe and Mail quotes an analyst who says that Papandreou wants his government to fall so that the opposition can take over and implement the very same policies they’ve criticized. Why, because they have no choice. So not to worry. Greece will swallow the austerity pill because there is no alternative. Others are not so sure because any government sufficiently competent to carry out the drastic reforms would never have gotten itself into a mess in the first place. The Globe and Mail notes the crisis is feeding itself. Austerity measures threaten to bring down whoever touches them. Only governments who are willing to spend or willing to lie about austerity and then spend have a chance in societies where the Free Lunch has become the great public god.

Of course, this “game” could turn out dreadfully if Greece either dissolves into chaos or the referendum defeats the country’s willingness to go along with the Euro deal. But if you’re optimistic, there’s a terrific upside: Greek politicians unite, order is restored and the debt deal goes forward without a referendum even being held.

Trouble is, Greece is only part of the problem here. As we’ve noted in this space before, Italian bond yields are rising – possibly to levels that are high enough to send the country’s finances over the edge. Meanwhile, the situation in Spain is looking messy again, with the country stuck in an apparent vicious cycle: Austerity measures are sapping economic growth, which must lead to more austerity measures.

To some extent the problems in Europe are in part problems of ideology. As Nigel Farage noted, the current president of the European Commission was a former Maoist revolutionary. Greece is run by a socialist party. How could they have imagined that austerity would be easy? What Europe now needs is a good model for sustainable development. So far two models have proved popular. One in Eastern Europe and the other in Western Europe. Neither has worked particularly well.

Eastern European Model: "A lie told often enough becomes the truth."

Western European Model: "I'd gladly pay you Tuesday for a hamburger today."

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