Europe faces a world of pain – even if Greece stays in the euro

Papandreou: referendum is a smart gamble

"Greeks punch gift horse in the face"
That headline on the satirical website, The Daily Mash, summed up the angry reaction of Europe's leaders to Greek prime minister George Papandreou's call for a referendum on the next bail-out.
No wonder. Merkel and Sarkozy and the rest stayed up until four o'clock in the morning last week trying to hammer out a deal. They were probably stunned when their blatant fudge still managed to persuade ever-optimistic investors that everything was going to be OK.

And now Papandreou pulls a stunt like this?
While their fury is understandable, what they may not yet appreciate is that this referendum could be the best chance that the eurozone has of remaining intact.
The trouble is, even if it does, Europe still faces a slump of massive proportions…

The Greek referendum is a gamble, but it's a smart one

Asking your voters if they'd like to submit to another round of painful wage cuts, rioting in the streets, and general economic stagnation, doesn't sound like the smartest political strategy.
But in Greece's case, it could be the best option available.


The situation in Greece sums up the key problem with economies and voters in general. No one complains during the good times. Even if a boom is clearly unsustainable, very few people want it to end. Politicians have every incentive to take the credit for the good times. The last thing they want to do is to stop everyone's fun.
Of course, after the boom, you get the bust. That's often when the boom-time politicians lose their jobs. Whoever takes over gets to blame the previous mob for the bust. Then, as long as recovery comes quickly enough, they get to take credit for that.
The population won't like putting up with the pain of the bust. But they will. After all, they've slung out the previous incumbents. Whatever the new guys do, they voted for them. And if they do a bad job, they can get rid of them next time.
The problem in Greece is that the pain is being imposed by someone else. Other Europeans might feel that they're being very decent in stumping up for this bail-out package. But all the Greeks see is the fall-out, the cutbacks, the rioting. And they don't feel as though they signed up for that. They feel as if it's being dictated to them by high-handed German officials, or some other unaccountable European bureaucrats.
With Papandreou's government already in a very shaky position, his best chance of political survival is to force the electorate to take some responsibility for what's happening to them. As my colleague Merryn Somerset Webb points out in the latest issue of MoneyWeek magazine (out tomorrow), the population needs to buy into this sort of pain if austerity and reform are to have any hope of succeeding.