The next few days will transform Greece and Europe

As it turns out, the Greek crisis ends not with a bang, but with a referendum.

It has been easy to ignore the doings in Greece for the past few years, with the perpetual series of summits in Brussels that never seem to resolve anything. But it’s time to pay attention. These next few days are shaping up to become a transformational moment in the 60-year project of building a unified Europe. We just don’t yet know what sort of transformation it will be.

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Whatever the exact phrasing of the question (and assuming the referendum goes forward as planned), it really boils down to this simple choice:

A “Yes” vote means that Greece will continue the grinding era of austerity that has caused so much pain to its citizens over the past five years, in exchange for keeping the euro currency and the monetary stability it provides.

A “No” vote almost certainly means that the country will walk away from the euro and create its own currency (which will surely devalue sharply), bringing financial chaos in the near term but creating the possibility of a rebound in the medium term as the country becomes more competitive with its devalued currency.

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Ergo, the Greek banks are, or will soon be, out of money, and the ECB will be disinclined to open the floodgates again in the absence of a bailout deal. That’s why the government has effectively frozen its financial system, closing banks and the stock market on Monday.

Capital controls that limit people’s ability to withdraw and move money out of the country are, it is safe to say, not a sign of a healthy currency union. It would be hard to call the dollar the national currency of the United States if laws prevented me from taking Maryland dollars and depositing them in a Virginia bank.

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But if you zoom out a little further from the brinkmanship, this standoff goes from remarkable and shocking to inevitable and even overdue.

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What happens now?

This isn’t 2010. European banks, governments and financial markets have had years to develop contingency plans for what would happen if Greece exits the euro. There may be a middle ground, too, in which Greece semi-exits the euro: Imagine keeping the currency but with such strict and permanent capital controls that Greek’s euros are actually a different currency from the one used in Paris or Rome.

Expect the ECB and European institutions to deploy enormous financial firepower to prevent a Greek exit from spilling over to Portugal and Italy and Spain. But saying that this won’t be a Lehman Brothers-style economic catastrophe isn’t the same as saying it would be a good thing. In geopolitical terms it would push Greece closer to a hostile Russia. It would set a precedent that the European currency, and the European Union more broadly, is more fragile than its leaders would like the world to think.

Full article: The next few days will transform Greece and Europe (Sydney Morning Herald)