Greece: Papandreou’s All-In Bet

Greek Prime Minister Papandreou’s referendum bluff just might work

Democracy? In Greece? Investors and political elites squawked in early November at the prospect of ordinary Greeks getting a chance to vote in a referendum on the latest austerity package handed down to them by foreign powers. The betting was that angry citizens would reject the deal, jeopardizing the future of the euro zone. In the long run, though, more democracy just might be the best thing that could happen to European solidarity.

The creation of the European common market after World War II and the euro in 1999 were projects of the Continent’s elites. They believed that economic and monetary union would bring political harmony, ensuring that Europeans would never again go to war with one another. Ordinary Europeans never bought into the idea that becoming a United States of Europe would require surrendering their national sovereignty. Now that the single currency is in crisis, they’re balking at doing what must be done to keep the euro zone from fracturing. The world has learned the Greek word for no: “Oxi.”

On Oct. 31, Greek Prime Minister George Papandreou made an all-in bet that democracy, rather than being the Achilles’ heel of Europe, is the only way to save it. Papandreou reasoned that the way to win the grudging support of the Greek people for painful austerity measures was to force them to make the hard choices themselves—in essence, to take personal responsibility for what happens to their country.

Papandreou wanted to force Greeks to face up to the desperateness of their situation. An Oct. 27 survey by the Greek daily To Vima found that 58 percent of Greeks considered the bailout package “negative” or “probably negative.” But 72 percent want to keep the euro as their currency. They can’t have it both ways. By seeking a referendum, Papandreou “wanted to tie the two together, to force that contradiction into the open,” says Yiannis Koutelidakis, an economist at Fathom Financial Consulting in London.

Papandreou’s gambit—which harks back to Athens’s role as the birthplace of democracy 2,500 years ago—didn’t work so great early on. It provoked a rebellion in his own Socialist party, Pasok, raising the risk that he would lose a vote of confidence in Parliament that was scheduled for Nov. 4. If the government falls, the referendum might never occur. Papandreou also shocked foreign leaders and the financial markets. “The Greek move is irrational and dangerous from their point of view,” the website of the French newspaper Le Monde quoted a close aide to French President Nicolas Sarkozy as saying. Papandreou was summoned to explain himself at the G-20 summit in Cannes.

Investors who had clung to the hope that Greece might avoid default bailed out. The yield on Greece’s two-year government bond soared 11 percentage points in a single session to reach just under 90 percent on Nov. 2. The European Financial Stability Facility—which is designed to protect the likes of Greece, Portugal, and Ireland—postponed a €3 billion debt issuance because of market turmoil. Jim Reid, an analyst at Deutsche Bank in London, warned in a research note of “copycat calls for referendums if things get tough elsewhere.”

Papandreou’s move did earn plaudits from Europeans who argued that no debt deal can stick if it’s opposed by large swaths of voters. “There is some evidence the Greeks will support their leader when the chips are down,” Sven Boll, a columnist for Germany’s Spiegel Online, wrote on Nov. 1. “At least every Greek gets to decide, and can no longer complain about their government bowing to international demands.”

Papandreou has become a master of negotiating from weakness. By signaling that he might lose a referendum, the Greek leader might extract more favorable terms—say, a bigger haircut on the value of debt that Greece owes. Greece’s creditors don’t dare call his bluff because the extreme belt-tightening they want is so onerous that Greece might conclude it would be better off defaulting and going back to the drachma.

Domestically as well, Papandreou has been so battered by strikes that he has little to lose from a no vote. A yes vote, meanwhile, would bring “political stability, avert the threat of a snap election, calm international markets, and increase confidence that the European debt crisis—as well as the Greek debt crisis—can be eventually solved,” Blanka Kolenikova, who tracks Greece for IHS Global Insight, wrote in a research note.

Even if a referendum never occurs, Papandreou’s initiative has changed the conversation by inviting the public’s engagement as the best way to engender support for difficult decisions. As Papandreou himself put it: “Democracy is alive and well, and Greeks are being called to rise to a national duty beyond the regular electoral processes.” No matter who leads Greece, and Italy, and Germany, it is ultimately the people who will decide the fate of the euro.


    The bottom line: Papandreou is betting that a referendum will get Greek voters to buy into austerity. His EU peers are stunned by his audacity.

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