On Greece and Democracy

Should someone hold a referendum on the Greek bailout?

A few days ago Greek Prime Minister George Papandreou shocked the world by announcing that his country would hold such a vote. European leaders, who had just concluded a tough negotiation on Greek’s debt, condemned the move. Financial analysts the world over warned of the potentially calamitous outcome of the bailout’s rejection by Greek voters. Now Papandreou is backing off in exchange for support from his political opponents.

But setting aside the potential economic consequences, I’ve been trying to puzzle out whether I think Greece should be voting on something so consequential.

  • On the con side, I can understand the frustration of European leaders. They spend a great deal of time, energy, and political capital to hammer out a deal. Then, just when they had settled on a deal that was mutually acceptable and succeeded in assuring the skittish markets, their negotiating partner suddenly backed away from his guarantee of the deal, deciding instead to put it to voters. This smacks of negotiating in bad faith.
  • There is also the real concern that the particularities of the deal are too complex to be put to a vote of the populous. Referenda are rather blunt tools for public policy making. It is easy to imagine Greek voters focusing on the austerity measures imposed by the bailout rather than the need for long-term economic stability.
  • Those outside Greece may rightly ask why the voters of one nation should get to decide the economic future of the entire eurozone. If the vote fails, whether Greece is removed from the eurozone or not, the impact is potentially devastating. Not only might it lead directly to a severe worsening of debt crises in places like Italy, but it’s likely to substantially weaken the euro. That in turn would limit the economic growth of what are currently the best sources of stability and crucial funding: Germany and France. Is it wise to put an issue with such broad consequences to vote by a single electorate?
  • On the pro side, the specter of elite politicians and government bureaucrats working out a deal of this scope without a direct popular mandate is troubling at best. The deal would significantly constrain Greek’s internal affairs in areas of taxation and spending. The nation would be sacrificing a bit of its sovereign control in exchange for funding that is likely to go primarily to foreign entities and financial institutions while the government spends considerably less on its own citizens. Beyond that, the deal has implications as a precedent for later bailouts. If a slice of Greek sovereignty is handed out by government leaders now, what’s to prevent Italian leaders from doing the same thing in a few months?

I think one reasonable response to this would be a eurozone-wide referendum establishing the authority and boundaries for future financial interventions. The eurozone did a terrible job of policing its member states to keep their fiscal houses in order according to their treaty obligations. Now they face a crisis which requires extraordinary economic measures while they lack a corresponding political process. Ultimately, that’s not good for the legitimacy of government at any level.

I expect that Papandreou will ultimately pay the price for this bailout and the accompanying austerity, regardless of whether the opposition joins him to avoid a referendum. But toppling him won’t fix the problem of the mismatch between a national government and an international currency. And the eurozone is only the most visible example of how a global economic system is swamping our national political systems.

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