The Greek referendum on July 6 will be a tough day for Europe. Henrik Enderlein talks us through it.
The case of a “no” vote
First, if the no-vote wins, then it is hard to believe Greece can remain in the euro. But as there is no legal mechanism for exit from the single currency, there is the risk of enormous uncertainty everywhere in Europe on what would happen next. Will Greece remain a member of the European Union? Which assets and which liabilities will be changed into Drachme? Which is the legal authority deciding on such far-reaching matters? What if Greece simply declares to remain in the euro? Can and should the country be cut-off from the electronic payment systems?
It is crucial such questions will be addressed swiftly by the European Commission, the European Central Bank and the member states.
We all know many matters involve tough political choices, but if there is one lesson from the Lehman bankruptcy, then it is that quick and powerful decisions matter a lot in order to keep uncertainty under control and avoid any kind of over-reaction.
This logic is also important when it comes to protecting the integrity of the rest of the euro-area. There are no reasons to believe Grexit would spark an immediate wave of contagion. Italy, Spain, Portugal, Cyprus and Ireland look quite stable today and they are likely to easily resist a short-term rise in spreads that could be the main short-term consequence of Grexit.
But the main challenge to these countries is not the sovereign debt channel. It’s the banking channel. If citizens in the former crisis countries realize that exit is an option and that deposits can be changed into currencies other than the euro pretty much overnight, then many will look at options to transfer their funds permanently to supposedly safe-haven bank accounts in countries like Germany.
I fear Grexit could trigger a gradual but accelerating deposit flight from the periphery to Germany. To prevent this, the euro-area would have to prepare a credible response. But that’s not trivial. If the response is mere lip-service (“we will ensure all deposits are safe”), then it will be tested, and it might fail. If the response is to be credible and based on a strong institutional and legal framework, such as the first elements of banking union, then time will be needed to negotiate it. And also, the potential price-tag of a European Deposit Insurance Scheme is very high as massive risk-pooling is involved. European leaders and their populations would have to make up their minds very quickly on how to solve this conundrum.
In case of a “no” vote, every day of hesitation runs the risk of permanently weakening the foundations of the common currency.
The case of a “yes” vote
Contrary to what is currently suggested by most European leaders, a “yes” vote is not the simple solution to all problems. True, a “yes” vote would make clear that the Greek people agree to the balanced proposal put forward by the EU Commission late last week. But the challenge is that the basis of that proposal would no longer be available.
The compromise proposal is linked to the completion of the second Greek program, which runs out in a few hours. After a “yes”, the only possibility to transfer money to Greece is a third program or some other kind of agreement between the creditors and Greece.
But it is unclear under which time horizon and with which government such a deal could be negotiated and agreed. Alexis Tsipras has announced that after a possible “yes” he would submit the compromise to parliament for adoption and then resign. Yet, as the simple confirmation vote of the referendum result by the Greek parliament would not be sufficient to finalize a new program (a third program would require an entirely new memorandum of understanding), there would be no directly available lega, basis for the creditors to start transferring money to Greece in order to make the country very quickly solvent again.
After a resignation by Tsipras, elections would need to be held within 30 days. The outcome of these elections is unclear. In fact, Tsipras could win again. So the European creditors and IMF would probably remain very cautious with making large new loans until political stability is guaranteed.
The problem is that Greece will have to make a payment to the IMF very quickly after 6 July and also pay the ECB on 20 July. A formal default on either of those payments, triggering cross-default clauses, would have devastating consequences for the Greek banking system, which would be immediately insolvent. There is some discretion at the IMF on when to declare a formal default. It might be able to wait until after the elections that could take place in early August. But since the negotiation of a third program would also take a few weeks, time pressure is going to remain high. The room for maneuver for the ECB in giving Greece more time after 20 July is also highly limited. A maximum of 30 days could be granted.
But there is more than the external payments. Greece also needs to pay pensions and unemployment benefits. It needs to pay bills. Currently, there is no cash. And there won’t be cash on 6 July.
It is therefore important that the EU presents a decisive and credible short-term financing plan to Greece on the morning of 6 July after a “yes” vote. That plan would have put around 10bn EUR on the table as immediate and short-term help in the run-up to the elections. This amount should not be linked to conditionality or negotiations (again – there would be not government as counterpart), but it should be a sign of pure and pragmatic solidarity with the Greek people.
I am well aware that making such funds available is a legal challenge (ESM money requires a formal program), but perhaps the receipts from the ECB’s SMP program could be used more pragmatically, as could some funds from the EU budget under the EFSM scheme. I am also aware that there is a potential political challenge to make 10bn EUR available to a country that doesn’t have a functioning government and doesn’t sign a memorandum of understanding.
But if after a “yes” vote there is a prospect of paving the way for keeping Greece in the euro, then this opportunity should not be missed. German voters and their parliamentarians in particular need to prepare for making the right choices after 6 July.
This text was first published on the Jacques Delors Institut - Berlin’s website.