How Greece’s resounding ‘no’ to EU bailout sets a new precedent

It was always easy to assume that the crisis in the eurozone would be short-lived, and the might of the European Union (EU) and the two big powers - Germany and France - would ensure weaker nations would fall in line with decisions of the powerful. But the overwhelming ‘no’ in a referendum to decide whether Greece should accept a EU bailout or not demonstrates clearly that that the EU might is waning, and the future of the eurozone – that comprises 19 nations - is in more trouble than any would have anticipated.

Greece has been in economic turmoil since 2009, but the country successfully reduced its debt burden from 355 billion euros in 2011 to 280.4 billion euros in 2012. The European Central Bank (ECB) and International Monetary Fund (IMF) launched a bailout loan of 110 billion euros subject to certain terms and conditions in May, 2010. These conditions included implementation of austerity measures, structural reforms and privatisation of government assets.

The cardinal fault here seems to be the assumption that countries will continue to remain indebted and can be arm-twisted into implementing tax hikes and spending cuts in exchange for loans, with the least regard for their national pride. Left-wing politician Alexis Tsipras’ massive campaign against austerity and his election as the prime minister in January prove that the Greeks are ready to experiment with a new system, although its contours are yet to be clearly drawn. No country has left the eurozone so far, but an exit by Greece is a strong possibility. The Euro biggies like Germany and France may not want this to happen, as it could set a bad precedent, but their eagerness to prevent this is a lot lesser than, say in 2010. During that time, the troika of the EU, the ECB and the IMF kept bailing Greece out as a collapse would have had a deep impact on the eurozone. Not any longer, since the country’s debt is now consolidated in the hands of more prosperous European nations.

In 2003, on an official visit to Brussels, this writer came across diverse views among professionals in Europe on the eurozone’s future. For an outsider, the fissures in a unified Europe held together by a common currency was not too visible, but the discords in union are as old as the euro itself. There is an argument that Greece could have avoided its current economic mess if it was allowed to deal in its own currency, the drachma. If and when Greece gives up the euro and revives its former currency, the latter will be heavily devalued compared to the euro, which will help the country drive its exports. If Tsipras is successful in his experiment, there could be more demands from other European countries – especially weaker ones like Portugal or Spain – to leave the eurozone. Over the long-term, this could pose a challenge to the EU itself.

The results of the Greece referendum have shaken up the global markets, and also the Indian bourses, but it is unlikely to have any long-term impact. The Reserve Bank of India (RBI) governor Raghuram Rajan had recently said India is insulated to a large extent from the Greek shock as it has abundant forex reserves to the tune of $355 billion in its kitty. Also, the Indian markets are more worried about the local issues at hand, including slow recovery of the economy and the poor corporate scorecard. However, software and engineering exports are expected to be hit by slowing exports to Europe, a key market for them. India may escape any big hits, but for countries in Europe, the present developments offer some really big challenges.