After Greek Default, Euro Exit Hinges on Referendum

If Greeks vote “yes” and their government steps down, a eurozone exit may yet be averted.

After Greece failed to make a crucial €1.5 billion payment to the International Monetary Fund at midnight on Tuesday, its future in the eurozone seemed to hinge on the outcome of a referendum planned for Sunday.

Called by the country’s far-left government this weekend on whether or not to accept its creditors’ latest bailout proposal, the vote will now be a de facto referendum on Greece’s eurozone membership.

Germany’s chancellor, Angela Merkel, on Tuesday said no decisions about what to do now Greece is entering default could be made until after the referendum.

Her economy minister, Sigmar Gabriel, added, “It must be crystal clear what is being decided. It is, at the core, ‘yes’ or ‘no’ to remaining in the eurozone.”

Other leaders, including France’s François Hollande, Italy’s Matteo Renzo and Jean-Claude Juncker, the president of the European Commission, said much the same thing.

Polls have consistently shown that most Greeks want to keep the euro. But the ruling Syriza party also remains popular while a majority backed its uncompromising negotiating tactics that brought the country to this point.

Although neither the IMF nor rating agencies consider Greece’s nonpayment on Tuesday an actual default, it doesn’t have the money either to make good on €3.5 billion in bond redemptions that are due in the middle of July. If Greece fails to make that payment as well, the European Central Bank — which has so far spent €89 billion to keep the nation’s banks afloat — would probably have to cut off funding and drive the country into bankruptcy.

With capital controls already imposed, it is difficult to see how a bankrupt Greece could stay in the euro.

But David Gordon and Thomas Wright argue in Foreign Affairs magazine that a full divorce is unlikely for geopolitical reasons.

Greece lies at the heart of Southeastern Europe, Europe’s least stable neighborhood. There are already signs that Bulgaria and Serbia are vulnerable to contagion from the failure of Greek banks. Instability in the Balkans was part of the rationale for Greece joining the eurozone in the first place. Full integration into the European Union, it was believed, would stabilize Greece and, in turn, have positive geopolitical effects on the region. The converse remains true as well — failure in Greece will exacerbate growing tensions in Southeastern Europe. Thus, the ties that bind Greece to Europe, and vice versa, are unlikely to break.

No one understands this better than Merkel, the two write, who leads Europe’s most powerful country and Greece’s biggest creditor.

She remains acutely aware of Greece’s long flirtation with Russia and of Russian president Vladimir Putin’s continuing efforts to sow discord in the EU.

At the Atlantic Sentinel reported this weekend, a Greek eurozone exit could herald an anti-Western shift in a country where the former communists and far-right nationalists who rule in coalition are already sympathetic to Russia.

Russia’s strategic goals in Greece include maintaining a monopoly position on the Balkan gas market, finding an ally in Europe that can block another round of sanctions the bloc imposed after Russia seized the Crimean Peninsula from Ukraine last year and ultimately gaining unimpeded access to the Mediterranean for its warships.

However, it will be difficult for Merkel to convince her conservative party and her voters that such vague strategic threats are worth sending billions more to Athens to keep the country firmly in the Western camp. And even if they understand and agree, they might see this as yet another form of Greek blackmail.

The referendum could be decisive.

A “yes” vote would likely force Prime Minister Alexis Tsipras and his Syria-led coalition to resign and allow a government of national unity to take over. It could restart negotiations for financial support to meet the ECB deadline.

Relieved to be rid of a government that constantly tested their patience, European leaders may then be willing to throw Greece another lifeline, provided it recommitted to reforms — if possibly on an extended timetable.

Syriza canceled economic reforms its predecessors agreed to, reneging on the terms of Greece’s bailout while still expecting other European states to hold up their end of the bargain.

If it stays in power after a “yes” vote — or Greeks vote “no” — it would be unfeasible for other European politicians to agree to another bailout and Greece would likely be ejected from the eurozone.

In that case, Gordon and Wright predict “Europe would be faced with the worst-case scenario of a weak and alienated Greece becoming a ‘free radical’ in Europe’s least stable region.”