Tsipras wants more time.

Photographer: Louisa Gouliamaki/AFP/Getty Images

Greece's Turn to Resist a Referendum

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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In 2011, overwhelming opposition from Greece's European partners forced Prime Minister George Papandreou to withdraw a proposal for a referendum seeking a “clear mandate” from voters to carry out European Union-backed policies. Last week, the opposite scenario unfolded: Germany suggested that the Greek government hold a plebiscite on whether to accept creditors' demands for economic reforms or ultimately leave the euro zone. This time, however, it was Greece that demurred.

QuickTake Greece's Fiscal Odyssey

This role reversal reveals at least three consequential aspects of the changes, real and perceived, in the interactions between Greece and its European partners:

  •  First, having achieved progress on containing and isolating the Greek crisis, Europe seems a lot less worried about the potential for negative spillover effects should the multiyear drama now end in tragedy.
  •  Second, Europe is becoming less resistant to the notion of Greece exiting the single currency, especially if this were the result of a Greek decision rather than one imposed by its EU partners.
  •  Third, the proposed referendum would push the Syriza-led government into a lose-lose situation.

To understand these three developments, it is worth recalling why Europe crushed the referendum proposed by the Greek government in 2011.

Confronted by pockets of internal opposition, Papandreou saw the referendum as a way to mobilize broad-based voter backing to implement difficult economic reforms. His European partners strongly opposed this idea for two reasons: concern that a Greek referendum would set the wrong example for other peripheral economies that were struggling to restore market confidence, including Ireland, Italy, Portugal and Spain; and concern that a bad referendum outcome would push Greece out of the euro zone while Europe still lacked the instruments and institutions to contain the collateral damage.

Almost four years later, Europe is far less worried about the adverse consequences of a Grexit.

Markets are calmer, peripheral economies have taken steps to clean house, regional institutions have been strengthened and officials are confident they have many more tools to contain the damage from a single member country. And although no European official would wish to go down in history as the person responsible for the first euro zone exit, more seem to be coming around to the view that such an outcome could be in the longer-term interest of the union.

The change in Europe’s attitude has also been influenced by events in Greece. Syriza’s election success was fueled by repeated promises to alter course on economic policy, including by being less compliant with the austerity demands imposed by Greece's European partners and the International Monetary Fund. At the same time, the government's ability to secure agreement with its creditors has been repeatedly undermined by public disagreement, a trust deficit, and rookie governing mishaps. In such circumstances, a referendum presents a lot more downside for the Greek government than in 2011.

A referendum that showed broad-based support for EU-imposed measures would undermine both the unity and electoral credibility of Syriza. And it could force a general election, with highly uncertain prospects for the party. It also would allow Europe to take a firmer negotiating stance on what Greek Prime Minister Alexis Tsipras again described Friday as his “red lines,” in particular cuts to pensions and wages.

Even the rejection of EU-imposed measures in a referendum wouldn't be a good outcome for Syriza. The vote would accelerate capital outflows, risk a large-scale run on banks and make it very hard for the European Central Bank to continue to provide Emergency Liquidity Assistance, all of which would bring closer the country’s economic and financial implosion. It would be a matter of time (and not much time) until Greece was forced out of the euro zone in a messy, disorderly and costly fashion.

The Greek government’s hope is to retain control as it secures time to compel creditors to agree to an easing of austerity measures, a reorientation of some structural reforms, greater debt relief and a large injection of immediate funding beyond what is being provided by the ECB.  That is why it will resist a referendum; and why its European partners will continue to insist on such a vote.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net