Greek Prime Minister Papandreou survived the parliamentary vote of confidence, vowed to form a national unity government, and hold elections in March. At first blush, this would appear to recover the modicum of stability earned by the European Union with its latest bailout package. Not so fast.
For those of you not tuned into this telenovela, Prime Minister Papandreou threw global financial markets into a frenzy earlier in the week by declaring he would put the latest shipload of other people’s money to a public referendum in Greece. The bailout plan is deeply unpopular in Greece because of the government spending austerity its receipt is conditional upon; if put to a referendum, the Greek polis would almost certainly have rejected further austerity.
The austerity/bailout deal forces a 50% write-down of Greece’s debt on European banks, which German and French governments are in a position to enforce. Greece will receive an additional $12 billion to cover its debts, which it needs in the next couple of weeks. This is a good deal for Greece, a half-default with far fewer deleterious consequences than an outright default. But it is also a painful deal: 100,000 additional public sector jobs will need eliminating, unemployment is projected to 20% and the economy will not recover for years and years.
Some Greek politicians, including the leader of the opposition New Democracy Party, believe it would be better for Greece to default and leave the Euro than endure what will be at least a decade of austerity its citizens are agitating against — and the economic and political cases for that view are sound, even though it would have a major disruption for Greece and the global economy.
Papandreou’s referendum gambit outraged other European leaders and cost him the support of crucial lawmakers in his own party. He survived the confidence vote on the basis of support by New Democracy party, who voted in favor of the government on the basis of a political deal that (a) a caretaker government including them be immediately formed, and (b) Prime Minister Papandreou step down. They wisely insisted on a separate, later, vote for the austerity package.
There is at least one more crucial vote by the Greek parliament, and ratification by other Eurozone parliaments, to come before even this probably inadequate bailout package can come into being. The fundamental problem for the EU in managing this crisis is that the skittish ways of financial markets argue for large-scale, rapid political commitments while the politics of loosely lashed together sovereign governments preclude that solution. It’s synchronized swimming when what is needed is a burst of speed.
Daniel Drezner, a witty and smart professor at The Fletcher School has a fantastic blog post about being taken in once again about believing the Europeans have solved their crisis. I so wish I’d written it.
(photo credit: Karl-Ludwig Poggemann)