Euro or Drachma, Greece Must Finally Choose

The end of the road.

Photographer: Kostas Tsironis/Bloomberg

Greek Prime Minister Alexis Tsipras seems to be about as good at managing down as he is at managing up. Which is to say: not very.

Tsipras and his neo-Marxist political party, Syriza, long ago alienated their European creditors with their demands to disregard the terms of the country's bailout, boost public spending and nevertheless stay in the euro. Now Greece is borrowing from local governments to make ends meet, prompting cries of protest from Athens to Zakynthos.

To ask whether Tsipras is entirely or only partly to blame for this mess is by now beside the point. Europe has dug in and is apparently preparing to let the so-called Grexit happen. The question for Tsipras is therefore what he should do if Europe insists that Greece abide by the failed bailout program. If he intends to abandon it and default on Greece's debt -- with the risk that this would force Greece out of the euro system -- he should say so, and ask Greek voters to support that position in a referendum.

This is the choice -- bailout or pullout -- that Greeks haven't yet made. They weren't asked to make it in 2011, when the euro group effectively stopped then-Prime Minister George Papandreou from holding a referendum on the bailout. And it's the same question that Syriza short-circuited during the campaign for January's elections, by promising Greeks they could have the no-conditions bailout the country's creditors wouldn't give.

As part of their scorched-earth negotiating tactics, Greek officials have begun threatening to hold either fresh elections or a referendum on whether Greeks want to keep their "dignity" or the bailout. Neither would help. To pose a referendum question this way is basically to give Tsipras permission to abandon the euro -- without ever asking Greeks if that is what they want. (Opinion polls suggest that two-thirds to three-quarters of Greeks still don't want to return to the drachma.)

A properly worded referendum, however, could create an opportunity to reboot talks between Greece and its creditors, while injecting some democratic legitimacy into the bailout process.

Time is running out, of course. Tsipras would have to agree to the wording of the referendum with the country's creditors, avoiding a rerun of the Papandreou debacle; the euro group, the European Central Bank and the International Monetary Fund would in return agree to float Greece through the month or so that it would take to get an answer.

The mere fact of a referendum would have costs, in the form of capital controls. Capital flight from Greek banks is already at dangerously high levels, so the uncertainty created by announcing a referendum on whether to leave the euro would trigger further panic. Without capital controls, the banking system would very probably collapse before a vote could be held. Such controls would put new pressure on the Greek economy, but they are survivable and might help to put a floor under the Greek crisis, whatever the outcome of a referendum.

None of this even considers what that outcome might be. Yes, voters might decide Greece should default and leave the euro. But by now there is little to lose -- an accidental Grexit seems increasingly likely -- and Greeks would at least have chosen their future. And if they decided to continue the bailout, either Syriza or a new government could return with a mandate to trade the economic reforms that Germany and the IMF are demanding, for the reduced austerity and budget surpluses that Greece so clearly needs.

No one can say whether a referendum would fundamentally change the terms of this debate. But it’s clear that a change is necessary. Without that, it's hard to see how the impasse ends well.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.