Referendums and markets don't mix. A referendum on Scottish independence is coming, and already the markets, or at least analysts from Citigroup, are saying it “will create huge uncertainty” and advising investors to shun Scotland. The trouble is, democracy is all about uncertainty. Democracy is inconvenient. But in times of constitutional uncertainty, it is absolutely paramount that the people clearly register their support or opposition to change.
In Greece, where democracy began, the markets are threatening to bring the house down because the Greek government is going to put the EU rescue package to a referendum. This is being cast as a breach of faith, a spanner in the works, an “abject failure of leadership” as one financial pundit put it yesterday. How dare this jumped up prime minister, Papandreou, ask the people for their point of view? What have they got to do with it?
Well the people have quite a lot to do with it. It is they who will be losing their jobs, suffering a decade of falling wages, higher taxes and the humiliating presence of an “occupying force” of Brussels civil servants telling their treasury ministers what to do, where to cut, etc.. It seems to me that this involves such a diminution of national sovereignty that it really should be endorsed by the people. After all, changes in the Treaties of the European Union require a referendum of the people – though governments in countries like Britain are peculiarly reluctant to hold them.
The markets are a mob – a capricious and unthinking herd, liable to emotional spasms and irrational passions. Think of the dot.com crash, the property bubble, irresponsible bank lending. The markets are not capable of rational thought; only people are. The mistake was not to tag a ballot onto the Brussels bail out last week, so that it could be clear that the people of Greece would be fully behind the deal. Or not.
Now, admittedly, the referendum proposal did rather come out of the blue. The Greek government is in turmoil, and we don't even know, at this stage, whether Papandreou will survive in office long enough actually to hold it. But I have a simple view of these things, which is that the people do have a right to decide on their destiny, and moreover, that an austerity programme of the magnitude of the one facing the Greek people, really needs a democratic endorsement. Better a referendum than a protracted general election.
The choice before the Greek people is this: they either stick with the euro austerity plans, or they go for default. At present, there appears to be a considerable constituency for default – certainly on the streets and in the media. But as we all know, it is dangerous to simply take the political temperature from street demonstrations. No one really knows what the mass of ordinary Greeks really think. Opinion polls suggest that a majority of Greeks are unhappy about about the deal, around 60%, but we also know that around three out of four Greeks say they wish to stay in the EU. A referendum campaign is the way to reconcile these conflicting views.
The costs of default could be far greater than the cost of the Brussels austerity. Restoring the drachma, at a hugely devalued rate against the euro, would increase Greek debt by at least 60%. This is because the debt remains denominated in euros and will still have to be paid. The cost of Greek borrowing would also increase because Greece no longer has the powerful economies of the EU supporting its currency. Greek peoples' savings and pension funds will of course be destroyed, overnight, Greek banks will collapse and borrowing costs to small businesses will soar. Those public sector workers, so vocal on the streets, and so defiant against Brussels, would be in penury and out of work because the government would not be able to borrow the money to employ them.
On the other hand, a default along the lines of the Argentinian default of 2001, would make Greek exports competitive, because they would be a lot cheaper. Markets don't look back, and once the default is over, if the economy appears to be stabilising, it's possible that investors might start lending again in five years or so. Greece could also negotiate some kind of loose peg to the euro and remain within the EU free trade zone. Greek holidays would certainly become a lot cheaper, and that could help build an economic recover.
But do the Greek people really want to be impoverished servants of wealthy German tourists? Maybe they do. By the time the markets start lending again, the Greek economy will be a shadow of former itself. With few natural resources, and very little advanced manufacturing, it would be in the situation of some low wage north African and middle eastern countries. It's not at all certain that the fragile Greek democracy would survive – it is only thirty six years since Greece was run by a military junta, and the colonels are restive again. The great thing about membership of the EU is that it requires countries to respect democracy, civil rights and the rule of law.
So, Greece has a very grave decision to make, with momentous implications that will affect the country for decades. A majority for the Brussels deal would impress the markets and ensure that the Papandreou government had a firm mandate for austerity, to implement the Brussels plan. A majority for default would also clear the air.. Greece could tell the private investors that they can sing for their money – or take a 90% haircut. A vote for default might even make Europe come up with a better offer, it if looks like the euro would collapse as a result.
What I find offensive is the way commentators have reacted as if a referendum is somehow illegitimate, a damaging distraction. When countries like China, under a communist dictatorship, start telling democracies like Greece to “shelve its unhelpful referendum” I think we have to ask who exactly these ”markets” really are. Democracy is always the worse choice – except for all the others. Last night, European leaders grilled Mr Papandreou about his plans late into the night. I hope he stands his ground.