THAT THE euro zone crisis is a race between economics and politics has been dramatically confirmed by the news that the Greek prime minister has called a referendum on the latest EU bailout package for his country. The 50 per cent write-down of international bank debt agreed there still leaves Greece owing 120 per cent of its gross domestic product and facing an even more draconian austerity programme.
George Papandreou’s resort to direct democracy is an audacious but desperate effort to legitimise the package by inviting Greeks to decide if they want to stay in the euro, thereby avoiding fresh elections as demanded by the opposition. But it also risks bringing down his government and collapsing the whole international effort to bail Greece out.
The key to understanding his move can be found in the sorry state of Greek civil society, public administration and political structures confronted with this deep-seated economic crisis. Greece’s two major parties, Mr Papandreou’s governing social democratic Pasok and the opposition conservative New Democracy, are highly polarised with very little overlap and no record of co-operation. Attempts to create a national unity government have fallen flat as a result. Public administration is deeply politicised, long subject to grossly partisan levels of staffing and so under-professionalised as to be incapable of implementing necessary structural reforms.
Most Greeks want to stay in the euro and accept the need for deep-seated reforms and political change. That is the backdrop to the large-scale protests, strikes and demonstrations over the last two years. These have been objecting to the extent of austerity rather than the need to transform the political and social systems with the help of its European partners.
That balance between austerity, reform and the urgent need to give a perspective for restoring economic growth and development is badly wanting in this crisis – in Greece and throughout the European Union. Greece deserves special help based on a politics of solidarity. Mr Papandreou’s government has gone a long way to reciprocate by imposing severe cuts in the public sector, spending, social benefits, and by privatisations, labour market reforms and higher taxation. Average living standards have been reduced by 16-20 per cent so far (compared to 5-6 per cent in Ireland).
That burden is too heavy and, like the level of state indebtedness, looks unsustainable socially and now politically. Badly missing is a readiness to stimulate economic recovery alongside the insistence on strict budgetary probity. Greece needs an emergency programme along these lines – and so too does the EU. Markets should realise that as they panic at news of the referendum – and so should the Group of 20 political leaders meeting this week in Cannes. If Mr Papandreou can convince all of them to look again at this he could bring some hope to the bleak political scene at home, making it easier for his party and its reform programme to survive. That is the audacious part of his initiative. Otherwise it looks like a desperate last throw.