Greece’s bizarre referendum

Cleisthenes, the father of Athenian democracy, must be rolling in his grave at the spectacle of Greece’s referendum this Sunday on whether or not Greece should accept its official creditors’ loan terms. For if ever there were a pointless referendum with no happy outcome, this has to be it. To add insult to injury, it is going to cost the country an estimated $100 million at a time when the Greek treasury is already running out of money to pay public employees and pensioners.

{mosads}Alexis Tsipras, the Greek prime minister, is urging the Greek electorate to vote “no” to the International Monetary Fund (IMF) and EU’s loan terms. He is doing so despite the fact that his European partners have made it clear that they will consider the referendum as not merely one on the terms of the creditors’ last offer, but rather as one on the question as to whether Greece wants to stay in the euro or not. The creditors are warning that a no vote would be construed by them as a no to Greece’s continued euro membership.

Undaunted by the creditors’ warnings and by a full-fledged domestic banking crisis, which has forced the government to declare a bank holiday for at least a week, Tsipras is happily proceeding with the referendum. He seems to think that if he gets his way on a no vote, as seems likely judging by the most recent polls, it will strengthen his hand in his protracted negotiations with Greece’s creditors for more bailout money. However, he seems to be overlooking the fact that his very holding of a referendum in defiance of his creditors’ explicit wishes, as well as his campaigning for a no vote, is all too likely to increase his image in their eyes as an untrustworthy negotiator with whom they would prefer not to deal.

Tsipras would also seem to be overlooking the fact that a no vote would harden the resistance of the far-left faction of his Syriza Party to a deal with the IMF and EU. If the electorate had just rejected the official creditors’ terms, the hard left is bound to ask how Tsipras could then cavalierly accept those terms. At a minimum, if Tsipras were now to strike a deal with the creditors, he would almost certainly split his governing party and thereby usher in another few weeks of political uncertainty that the country can ill afford.

A “yes” vote would also not be without its serious problems. In that event, which would be tantamount to a public vote of no confidence in his government, Tsipras could hardly continue as Greece’s prime minister. The optimists might argue that this would allow a technocratic government to be quickly formed in Athens, as occurred in 2011, which would be more acceptable to Greece’s official creditors. However, in today’s fraught Greek political climate, the more likely scenario is that Greece would once again be forced to hold general elections. Such elections in turn would subject the Greek economy to another month of political uncertainty that might push it to the point of no return.

At a time when the Greek economy is already again nosediving as a result of its banks being closed for a week and as result of heightened political uncertainty, this would not seem the time for Greece to engage in a frivolous referendum. Which makes me think that if I were a Greek, I would spoil my ballot in protest against the government fiddling while my country was burning.

Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.