The Greek debt crisis - is 'Grexit' inevitable?

Transcript of Question and Answer video with World Review expert Professor Enrico Colombatto on the future outlook for Greece with or without a referendum

What are the possible outcomes of the snap referendum on Greece’s debt crisis?

Professor Colombatto:

To begin with its not very clear that the referendum is going to take place because things are changing so rapidly. Tsipras has put forward a new proposal, and if the new proposal goes through, or is examined and taken seriously, the referendum is no longer on the table. Besides, the referendum would be about something which is no longer being discussed.

A couple of days ago the EU said that those proposals were no longer valid so they took them back. Now the referendum refers to those proposals. So why have a referendum about something which has become irrelevant?

So basically, I think if their referendum goes ahead – which will be nonsense, but we are going through a lot of nonsense these days – if the referendum goes through it is going to be a referendum about Tsipras rather than the Euro or the Greek situation.

So, in my view, it’s becoming more of a political referendum rather than a referendum about the economics and the economy of Greece.

What would happen if Greece was to leave the European Union?

Professor Colombatto:

There are two possibilities. If the ‘no’ wins, that means that Greece will have to quit the Euro to be consistent with the ‘no’. But in order to quit the euro they should actually quit the European Union because there are no separate treaties. It’s an all-or-nothing story. So technically they should quit, they should get out of the euro, which means get out of the European Union. And then apply again to join the Union, which sounds a bit cumbersome.

So, technically and legally it’s really fussy. And practically they would have to print Drachmas anyway because they are already out of euros now, so if they don’t get money in a couple of days they will have to print Drachmas.

How would Grexit impact on the EU?

Professor Colombatto:

In my view we have two lessons. One is the euro is no longer going to be a guarantee for public debt in the EU countries. So, countries like Italy, France and Portugal will have to wake up because the Greek example has shown that the European Central Bank will not do everything it takes to bail out their debtors.

The second message , which is more or less a long-term vision, is that this is going to mean the end of the euro as a political project. And if the euro survives it remains a technical issue, which means a choice about monetary policy, which means a choice about interest rates and exchange rates.

So, the euro might stay on but as a technical choice. And I’m not sure that all eurozone countries are happy to go along without a political design behind it.

Is it inevitable that Greece will leave the EU?

Professor Colombatto:

No, it’s not inevitable. If the European Central Bank keeps bailing them out Greece will stay in. Of course, its questionable that the same problem is not going to come to the surface again in a few months.

Even if the euro authorities are going to accept the last proposal put forward by Tsipras – which is actually a photocopy of the proposal the European authorities themselves put forward a couple of days ago, actually a week ago more or less. So even if that happens, I have my doubts that the Greek economy is going to grow rapidly immediately, that debt to GDP ratio is going to drop.

So my guess is that yes, if new money goes to Athens, Athens will stay in the euro for a few months. But then the bankruptcy problem will emerge once again.

So they will have some breathing space in order to do what they should have been doing over the past six months. That is, define by how much Greek debt is going to be forgiven. Or forgotten, if you prefer.

What are Greece’s options?

Professor Colombatto:

Suppose the referendum goes through. If the ‘Yes’ wins then Tsipras has a personal problem because he has been elected with a different agenda. So if he were consistent with his own beliefs and promises, he should resign. Then that would open a political crisis in Greece, which would add to the existing problems.

If the ‘Yes’ wins and Tsipras does not resign, he is going to count as less than nothing in Europe because he is going to be a delegitimised leader.

So whether we like it or not, Tsipras has destroyed himself politically. And that is bad news for Greece in a way, because that means that nowadays Greece has an option between chaos or having Technocrats in Brussels telling them what to do and running the show.

I’m afraid that the Greeks are going to resent that. If that happens there’s going to be chaos anyway.

So the outlook is not bright. We can have some breathing space in terms of financial support but the political situation in Greece is going to be really tense.

(Photo credit: dpa)

  • Greece's Prime Minister Alexis Tsipras on Saturday, June 27, 2015, decided to put creditors' proposals for reforms in exchange for financial aid to a July 5th referendum.
  • The premier said this was the democratic way for Greeks to say whether they will accept more budget cuts and taxes in order to maintain international aid. He has been urging people to vote against it. This has angered creditors.
  • Greece made last-minute overtures to its international creditors for financial aid on Tuesday, June 30, 2015, but it was not enough to save the country from becoming the first developed economy to default on a loan with the International Monetary Fund (IMF).
  • Greece was not able to repay 1.6 billion euros it owed the IMF, in what was the largest missed payment in the Fund's history.
  • Tens of thousands of people had rallied in Athens' central Syntagma square - one rally to support the government and the other to push for Greece to remain in the euro.