Thoughts on the Greek Referendum

While I have consistently been highlighting the political risks in Greece that could throw a new monkey wrench into European plans and global capital markets, today's turn took me by surprise. The euro had been trading heavily all day and Italian bond yields were holding above 6%, despite talk of ECB purchases, and the French-bund spread was widening. News that the Greek government was going to hold a referendum on the European agreement accelerated risk-off moves and the euro retraced in full the impressive gains scored last Thursday in response to the broad outline of the European plans, the third comprehensive, final deal put forward this year.

It was clear that the measures that Greece is about to undertake require greater support than is evident in the 153 seat majority of the 300-member lower chamber. Some officials, including opposition leaders and the government's finance minister, suggested that the agreement should seek to secure a super majority of 180 seats. This posed a risk to the government since it has only a slim majority, facing strong internal dissent, an opposition that wants to bring down the government. The small non-aligned political parties do not have enough votes for the government to achieve a super majority.

Facing a defeat if it tried that, the government appears to be trying an end run around parliament and appealing to the public. Democracy trumps representative government. In a calculated risk the Socialist government seems to think it is easier to win the referendum than the super majority. The polls over the weekend showed around 60% of the public oppose the agreement. Yet 70% want to stay in the euro zone. The government may have an uphill fight, but all it needs is 51% (see petite oui secured in France for the Maastricht Treaty) and pro-European sentiment can be tapped.

Moreover, an awareness campaign, explore the consequences of a rejection of the European agreement is can be effective in swaying public opinion. As onerous as more austerity and steep losses by the pension funds may be, the alternative is even more stark. Under a hard, disorderly restructuring, a sharper economic contraction, collapse of the financial system, pension savings all but wiped out, are likely consequences.

If the referendum takes place, and this is not posturing, it may not be until early next year. There is plenty of time for a spirited campaign. More immediately, Papandreou will submit to a vote of confidence this week. The debate appears to be tentatively scheduled for Wed and Thurs and the actual vote on Friday.