reflections

Jul 2, 2015 | 20:58 GMT

7 mins read

Referendum Battle Aggravates the Greek Crisis

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

Athens' decision to hold a referendum on austerity July 5 and the creditors' strategy of delaying the continuation of negotiations until after the vote have only exacerbated the Greek crisis. Greek Prime Minister Alexis Tsipras suggested he could resign if people vote in favor of the current agreement, but a vote against the deal could also bring about the collapse of the government and seriously damage the Greek banking sector. Regardless of the outcome of the vote, a Grexit remains possible and could have serious geopolitical consequences because of Greece's position in the Eastern Mediterranean. Should Greece leave the common currency, both the European Union and the United States will make substantial efforts to keep Athens in the European Union and NATO.

The Greek government and its creditors are playing a dangerous game. The Greek government tried to use the referendum as a negotiation tool, but the result was yet more uncertainty about the country's future. The goal of the referendum is unclear. Backers of the "no" vote, who include the administration in Athens, say the vote is not about Greece's membership in the eurozone. But backers of a "yes" vote are convinced that there is a direct link between refusing the creditors' deal and leaving the currency union. Both groups share a common feature: a deep fear of the future and uncertainty about what's going to happen to them after Sunday.

Greek officials say the vote is an expression of democracy and accuse the European Union of having double standards when it comes to Continental issues. Two large countries, France and the Netherlands, Athens argues, were allowed to vote against the European Constitution in 2005 without being threatened by the European Commission or the German government. While there is some truth to the claim, Athens has failed to present voters with a clear set of options and a concrete set of consequences.

The creditors are also responsible for this situation. The International Monetary Fund is pushing for debt relief and economic reforms. Many of the eurozone governments, including but not limited to Germany, are terrified that debt relief could create a precedent in Europe, especially because countries including Spain, Portugal and Ireland will hold elections within the next nine months and anti-austerity parties could make similar demands to Greece's. The European Central Bank, in the meantime, was given the awkward responsibility of making political decisions about the future of the eurozone when the bank was explicitly created to be an apolitical institution.

Germany's role is particularly significant. Over the years, politicians in Berlin have built up a negative stereotype about the Greeks. The stereotype has become so strong that it now limits the German government's room for action. Berlin officials themselves are divided when it comes to Greece. Some members, led by Chancellor Angela Merkel, consider a political solution necessary and believe that Greece is too geopolitically important to be kicked out of the eurozone or the European Union. Others, led by Financial Minister Wolfgang Schaeuble, believe that the eurozone is as strong as the weakest of its members and that the currency union would be better off without Greece.

The divide is not serious enough to jeopardize the German government, but the fear of more friction is influencing Berlin's reaction to the Greek crisis. During a July 1 session at the Bundestag, Germany's parliament, Merkel said no deal could be reached before the Greek referendum. Berlin and other EU governments are pushing for the "yes" camp to win the vote and potentially force Tsipras' resignation. Germany holds that capital controls and the fear of a Grexit will become so painful in the coming days that most Greeks will end up supporting a deal with the creditors.

A Dangerous Gamble

Many things could go wrong in this game. The Coalition of the Radical Left, or Syriza, is counting on a "no" vote, but a victory in the polls could come at a high price, especially if it leads to a collapse of the Greek banking system and social instability. The Greeks have so far withstood with stoicism the never-ending succession of calamities imposed upon them. Almost a week into the introduction of capital controls, Greece remains calm. People go on with their lives, and there have been no episodes of violence. The country is split between "no" and "yes" voters, but these divisions have not led to clashes between the two.

But Greek calm is not a given, and things could quickly escalate if financial conditions deteriorate. Syriza is opposed to a police crackdown on protesters, which means that the government could resign quickly in the case of serious social unrest. As a result, Tsipras could win the referendum and still be forced to resign.

If the "yes" camp wins, then a government resignation is even more likely. What would come after is probably a caretaker government or early elections and, almost inevitably, a new round of painful spending cuts. Tsipras will probably choose not to go down in history as the man who precipitated a Grexit, but as an honest leader who fought until the end and then stepped down. He is a young politician and is probably considering the possibility of becoming the leader of the opposition, given that things will probably not improve in Greece any time soon.

Things could also go badly for the creditors, because government change does not necessarily mean a more docile Greece. Regardless of the outcome of the referendum, any Greek government will have to live with the fact that a substantial number of Greeks voted against austerity. More important, Greek banks are so fragile that Greece could leave the eurozone no matter what is decided Sunday.

The Geopolitical Impact of a Grexit

The financial impact of a Grexit is a matter of permanent discussion given that the risk of a contagion to other fragile countries, such as Italy, Spain and Portugal, is unclear. But the geopolitical impact of a Grexit would probably be deeper.

Greece is at the European Union's southeastern border in between North Africa, Turkey and the Balkan Peninsula. The Eastern Mediterranean region is already in flux, with a civil war in Syria, political tensions in Turkey and a failed state in Libya. Greece is also an entry point for asylum seekers and migrants, many of whom could be linked to terrorism. Finally, Greece is a potential transit state for energy, including the Moscow-sponsored Turkish Stream pipeline and the Azeri-backed Southern Corridor routes.

A volatile Greece would probably worsen the security situation in the Eastern Mediterranean, since the lack of effective border controls could deepen Europe's immigration crisis. An isolated, impoverished and chaotic Greece could also lead to growing tension in the region. Most of the Greek political establishment, including Syriza, supports Athens' membership in NATO and the use of diplomacy when dealing with issues such as the reunification of Cyprus, the name conflict with Macedonia and border disputes with Turkey. EU and NATO membership and moderate governments have contributed to this situation. Nationalism finds prosperous ground in times of deep crisis, and it is not a given that a post-EU Greece would be exempted from this trend.

Things don't have to reach that point. Should Greece leave the euro, the European Union will probably make every effort to keep Athens in the Continental bloc. The U.S. government has so far pressured the European Union for a compromise to keep Greece in the eurozone. That pressure from the White House for a political deal with Greece would probably increase dramatically if Athens left the currency union. Thus, even if the current impasse is broken and an agreement is reached before things get out of control, the crisis has only put Greece closer to leaving the euro. 

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