German Economists on Greek Referendum 'The Euro Zone Could Face Ruin'
Part 3: 'Greece Would Be Bankrupt'
Kai Carstensen, CESifo Group, Munich
Papandreou urgently needs domestic political legitimation for his policies. That is the only way that reforms in the necessary scope can be feasible. Thus a referendum makes sense -- particularly since it will require the opposition to finally show its position. Perhaps it could even be the beginning of a "National Unity Government".
What would happen if Greece voted "no"?
In a democracy, there aren't any decisions for which there is no alternative. The people have the right to reject financial aid and reform prescriptions from outside -- with all the consequences that might entail. Because if European politicians were to take their own rules even slightly seriously, a rejection would mean the end of aid payments.
Greece would be bankrupt and would have to cease making interest payments and repayment of its loans. The government would also be unable to fulfil its obligations domestically. Pensioners, welfare recipients and state employees would be the first to feel the pinch. In addition, the flight of capital from the country would worsen because Greek banks, which would then be left with large sums of worthless government bonds, would be on the verge of bankruptcy.
All this would not only drive the country deeper into economic chaos, but would also subject the democratic system to a serious test. Nevertheless, all wouldn't necessarily be lost. Greece could leave the euro zone, it could devalue its currency and become competitive again. With any other route, it would be unable to get back on its feet without European aid payments for the foreseeable future.
What would a Greek "no" mean for the euro zone?
All the rescue packages that have been put together in euro zone for Greece and the European banks would go to waste. The countries would have to explain to their citizens how, despite every declaration to the contrary, guarantees could have turned into losses. The realization that the massive European rescue operation has failed would also have an effect on German domestic politics.
Above all, though, it would have consequences for the European crisis strategy. Instead of tying together ever larger rescue packages, politicians would finally be forced to discuss concrete measures for an insolvency act for countries. And it would have to create procedural rules for exiting the euro -- both voluntarily or by force. Then, perhaps, they would even come to the realization that a common currency does not necessarily constitute a common destiny.