How Screwed Are We This Week: To Hellenic Handcart?

How Screwed Are We This Week: To Hellenic Handcart?
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Greek Prime Minister threw his more powerful European counterparts into disarray this week by deciding that, having invented democracy, Greece was going to use it. Saying that an agreement hammered out during an all-nighter a week before would go to a public referendum saw stock markets shed all of the gains made in post-deal euphoria.

It is hard not to be faintly impressed by Papandreou's gambit. It was a move that risked humiliation at every stage, but whether it was a crazy play to force a dissident opposition into line or a bungled attempt to renegotiate a bailout package, it at least served the purpose of reminding the world that the Greeks still have a hand in their own fate - even if that fate is to choose between very bad options.

Although there has been a retrograde characterisation of the Greeks as weak and lazy supplicants in a round of European horse trading, this is unfair and untrue. Ordinary Greeks have been ill-served by the institutional weakness of their government - although many have taken advantage of gaps in that system.

Unfortunately for Papandreou, the French and the Germans, emboldened by their success last week, played their move with a straight bat. The eurozone's G2 articulated at last their threat to throw Greece out of the euro if it failed to comply with the rules of their help.

The accounting miracles that allowed the country to get into the single currency will not help them if they are ultimately removed.

In the first place, Greece sneaked into the exclusive euro club through the back door, and was allowed to remain in on the basis that if it painted its trainers black and pretended that they were shoes, one day they might turn into leather. The notion that the country would undergo self-imposed structural reforms without being compelled to was fairly absurd to begin with, and it has highlighted the weaknesses in the single currency area.

The eurozone has been embarrassed by the failure of its door policy, and like a drunk defending a bold lie in the face of reason, it has no option but to keep on fronting up.

Under the Franco-German plan, Greece will be obliged to sell off their infrastructure, take on deep economic reforms, cut public servants and start collecting taxes.

If they leave the euro, they will probably have to turn to the International Monetary Fund to help. That is what the IMF is for, after all. Under an IMF structural adjustment programme, they will be obliged to sell off their infrastructure, take on deep economic reforms, cut public servants and start collecting taxes.

In the latter case, the European Union - not just the eurozone - will have suffered a huge hit to its credibility and no one will buy the bonds of its peripheral countries, or even of Italy, creating big funding gaps and possibly a depression. The Greeks will probably suffer more, due to the effects of currency depreciation, hyperinflation and a total loss of confidence from international investors.

For Europe and for Greece the incentives were aligned, and in that context, deals tend to get done because neither side can drive too hard a bargain.

So Papandreou's move was a stroke of genius. In a high stakes game, he pulled out a wild card - the Greek people. Ignored in their protests in Syntagma Square for so long, he threatened to let them loose on the eurozone's grand bargain.

It was a doomed notion, but not a futile one. Domestically it allowed him and his cabinet to articulate to the electorate what was at stake. Perhaps more importantly, it reminded the central government in Europe that Greek sovereignty had to be respected.

And as for democracy? One way or another, Greece will have elections soon anyway, and with them the chance to examine who is best equipped to limit the damage done by previous political generations.