FAQ: 7 Questions And Answers About Greece And The Referendum

Wilson Mizner is credited with the advice to be nice to people on your way up because you will meet them on the way down. This may apply to us as individuals, but not to countries. We are struck by the fact that creditor nations are acting like creditors and debtor nations are acting like debtors, no matter their history. The picture to the right is from the 1950s. The Greek finance minister is signing off an a 50% reduction of German debt. 

1.  Why is Greece, whose economy less than 2% of Europe is dominating the headlines and investors’ attention?    

The end of the global credit cycle in 2008 first hit Greece in 2010. Europe was ill-prepared from an institutional point of view to cope with the crisis.  After Greece sought aid, several other European countries needed assistance, including Ireland, Portugal and Cyprus. Spain received assistance for its banking sector. The Greek economy has contracted by more than a quarter. Unemployment has soared.  In exchange for assistance, Greece committed to various austerity and reform measures. Due to the failure to implement the program, assistance was cut off in the middle of last year.  This led to elections and victory for a coalition of two extreme parties in Greece’s political spectrum, led by the leftist Syriza Party.  It campaigned on a pledge to resist austerity but stay within the monetary union. It is struggling to achieve both pledges. 

2.  Why did the Greek government call for a referendum for July 5? 

The Syriza-led coalition received about 40% of the popular vote the late -January election. To form a stable government, the party with the most votes gets an extra 50 seats in parliament. However, Prime Minister Tsipras argues that he did not have a sufficiently strong mandate to make such a momentous decision as rejecting the last offer of the official creditors (EU, ECB, and IMF). The reality is much more complicated.  On one hand, Tsipras had rejected the government’s call for a referendum on the first of two aid packages in 2011. That referendum was canceled, and that government collapsed. On the other hand, Tsipras is likely using the referendum as an instrument in the negotiating process.