Will Greece Leave the Euro Zone?
On Monday, Greek Prime Minister George Papandreou announced that he would call a referendum on the Greek financial crisis. †The week before, European leaders meetings in Brussels had agreed on a deal to restructure Greece’s $500 billion in public debt, on the condition that the Greek government impose even more stringent austerity measures than it already has. Greeks responded with civil disobedience, and anger, and Papandreou held a seven-hour cabinet meeting until 3:00 am Wednesday morning. While the Greek cabinet — where Papendreou has the slimmest of majorities — agreed to Friday’s referendum, one MP has quit the ruling Pasok Socialist party and the†center-right opposition, led by Antonis Samaras of the New Democracy Party, has called for early elections. Six leading Socialists have called on Papandreou to resign.
The referendum could bolster, or sink, Papandreou’s political capital. To say the austerity measures have been unpopular in Greece is a gross understatement. Perceiving that the fate — financial and otherwise — of their country is now in the hands of the European Union, Greeks fear they have already lost their sovereignty. They have been asking if membership in the euro zone is worth it, to have German Chancellor Angela Merkel and French President Nicolas Sarkozy “acting as if they were the real government of Greece.”
The EU’s so far “fairly technocratic“†management of financial crises among its members has failed fully to acknowledge the political, and the people, element:
During the two-year financial crisis, the wealthier countries of northern Europe, led by Germany, have insisted that their heavily indebted brethren in the south radically cut spending in return for emergency loans. They have stuck to that prescription even though austerity has undermined growth and increased unemployment in Greece, Spain, Portugal and now Italy, betting that people in those countries will swallow the harsh medicine because their only alternative is to default and possibly leave the euro zone altogether.
Greeks are no longer sure they want to remain in the euro zone and are considering a return to Greece’s old currency, the drachma. Leaving the EU and again using the drachma would make it almost certain that Greece would default on its debt and†that funds would be withdrawn from local banks. The currency would be devalued 50 percent and it would take years to again enter international credit markets. But proponents of the drachma contend that such dire scenarios are “overdone” and that Greece again being in control of its own currency can only benefit the country.
On Wednesday, Merkel and Sarkozy said that the next 8 billion euros of bailout funds will now be withheld from Greece until the beginning of December — the French president said that Greece will not receive a “single cent” unless it sticks to the terms of the deal –while characterizing Friday’s referendum in the Greek parliament as nothing less than a vote about whether Greece wishes to stay in the EU or not. Papandreou, who has said that he believes there is a “wide consensus among the Greek people… and the Greek people will speak soon,”†has been summoned to Cannes ahead of the G20 summit to explain why he called the referendum and thereby further undermined confidence about the bailout plan, not to mention the stability of the euro zone, in the rest of the world. China, with its $3.2 trillion foreign exchange reserves, has been courted to contribute to the EU’s bailout fund, the European Financial Stability Fund (EFSF). But Deputy Finance Minister Zhu Guangyao has said that, until the “situation in Greece is clarified,” it will not consider doing so.
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Photo 20 drachmas (1955) by Tilemahos Efthimiadis