Greek Referendum on the Bailout: Good Idea!
By Randall Holcombe • Wednesday November 2, 2011 12:28 PM PDT •
After EU leaders agreed on a new bailout plan for Greece, Greek Prime Minister George Papandreou has called for a national referendum on the plan, which has appeared to upset the EU leaders who crafted the bailout, and financial markets reacting to the uncertainty. Why? The people with the most at stake are the Greeks, and the referendum seems to have only beneficial consequences for everyone else.
Various proposals to deal with Greece’s fiscal problems have already been met with riots on the streets, and this plan seems just as likely to prompt riots and strikes from Greeks who don’t want to give up their government benefits. If the referendum passes, this would demonstrate general support for the bailout, instead of making it appear that Papandreou imposed it on his people. Passing the referendum would make implementing the bailout easier on Greece, easier on Papandreou, and easier on the rest of the EU.
If the referendum fails, the Greeks would be on their own to deal with their debt. This may bring some short-run hardship to Greeks, but should promote long-run fiscal responsibility—that is, unless the EU decides to continue its involvement. I think that further EU support would be a bad idea if the Greeks vote no, but then, I thought from the beginning that the EU should not have bailed out Greece. If the referendum fails, Germany, France, and the rest of the EU can then wash their hands of Greece’s problems, noting that the Greeks themselves rejected their aid. That would be good for the EU.
Some people are worried that a Greek default could lead to defaults in other EU countries, and argue a Greek bailout could prevent that. But the bigger risk is in the other direction. Bailing out Greece will lead to more fiscal irresponsibility not only in Greece but in other countries, and eventually could produce fiscal problems too big for the EU to solve. It’s better to send the message now that EU governments get their fiscal houses in order, while problems may still be manageable.
If the Greeks vote yes, that would simply allow the bailout the EU has already approved to go forward. If they vote no, that would create the opportunity to let the Greeks solve their own problems, which is what the EU should have done in the first place.