Greeks Say No to Austerity—Again—But There Was No Good Outcome in This Referendum

Free markets weren't on the ballot.


Greek Prime Minister Alexis Tspiras

Millions of Greeks made their will known today, and by a shockingly decisive margin asked their government to reject the terms put to it by the international community.

A yes vote in the referendum could have unlocked billions of euros in aid and the promise of continued "liquidity assistance" to keep Greek banks afloat. Instead, the people of Greece again voted down the austerity measures Greece's creditors are demanding in exchange for additional funding.

Yet according to the economists I spoke with this weekend, regardless of what the Greek people had decided, the outcome will be worse than it could have been. Put simply, the types of reforms Greece really needs—the steps it would have to take to get its economy growing again—weren't even on the table in this referendum. Voters were being asked to choose between big reductions in government spending (the only source of income for many Greek retirees) or a potentially catastrophic transition from the euro to a much-less-valuable drachma.

"Both choices imply some austerity," says Costas Azariadis, a respected macroeconomist at Washington University in St. Louis. "The difference is between a bad deal and a disastrous deal."

Vote Yes for the Status Quo

A yes vote in the referendum was a vote to capitulate to the International Monetary Fund (IMF) and the rest of Europe, which together hold over 300 billion euros' worth of Greek debt. In the end, too few Greek voters were willing to continue down the path of spending cuts that Greek Prime Minister Alexis Tsipras and his far-left Syriza Party say have impoverished the country over the last five years.

Previous Greek governments had been working to lower the country's debt burden. According to the IMF, as of May 2014, Greece was on track to bring its debt load down from 175 percent of GDP in 2013 to about 117 percent of GDP by 2022. But getting there required cuts to government spending that proved highly unpopular with the Greek people. They responded by voting Tsipras into power on a platform of persuading lenders to forgive Greece's debt without forcing the nation to continue making cuts. Today they reaffirmed that stance.

Vote No for Uncharted Waters

Last week Greece became the first developed country to miss an IMF payment. By voting no in the referendum, Greeks today cast their ballots in support of the Syriza Party that made the decision to default. In so doing, voters told the international community that ending Greece's austerity program is more important to them than repaying the country's loans.

There are three conceivable outcomes of the no side's big win:

  1. Lenders could surprise everyone by reversing course and agreeing to keep the bailout money flowing—despite the fact that Greece is refusing to continue making spending cuts.
  2. The European Central Bank (ECB) could declare Greece in default and cut off all further assistance, causing the country's banks to run dry and forcing Greece's government to reintroduce the drachma.
  3. The two sides could come to some sort of uneasy compromise between those two extremes, wherein Greece offers less austerity than Germany and the others want but gets less assistance from the ECB and IMF than Greece would like.

The Better Way That Isn't on the Table

Scott Sumner, who directs the Program on Monetary Policy at George Mason University's Mercatus Center, doesn't deny that the austerity policies Greece has already put into place slowed its economy "somewhat." Azariadis too acknowledges that austerity is "partly" to blame for the country's sad state. But in separate interviews, both insist there's a much bigger culprit: Greece's failure to implement free market reforms.

"What happened in the end was that the austerity was implemented—they cut the incomes of civil servants and pensioners—but they didn't reform the economy," says Azariadis. "So the economy is not operating at full capacity."

Sumner wishes there had been a "third way" on the ballot—an alternative to simply voting yes for austerity or no for socialism.

"What they really need throughout Southern Europe is labor market reforms," Sumner says. "That would involve things like making it easier to hire and fire workers. And by the way, it is easier in Northern Europe to hire and fire at will."

He points to the "cartelization" of many industries in Greece that prevents established players from facing true competition. Everyone from cab drivers to pharmacists to lawyers is protected. "You have to have connections to get a license," he says. "And those protections are aimed at propping up the incomes of the insiders, the people who have the lucrative positions. But then the outsiders have a harder time breaking in."

Azariadis makes exactly the same point. 

"Lots of economists have thought about this issue, and they all, left and right, have come up with the same proposals," he says. "The bureaucracy is enormous. To start a hotel, you need to get licenses, and the process of licensing takes many, many years. The civil service itself and the politicians are extremely corrupt, so the cost of doing business is very high, and that has choked off investment."

The solution, he says, is opening up the markets.

Neither Austerity Nor Reform

Some of the reforms Azariadis and Sumner support would raise revenue or reduce expenditures, and therefore do qualify as austerity measures. For example, privatizing ports and railroads or laying off workers from cushy government jobs would save money in addition to freeing up labor and capital to go to productive uses. 

But not all reforms fall neatly under a program of austerity. Some, like doing away with Greece's minimum wage and ending the price controls that prevent its markets from working right, could actually be budget neutral. Even still, Tsipras has balked at the very idea of such changes—and by voting no in today's referendum, the Greek people made it clear they stand behind him.

The problem is thus a lack of political will throughout the country. Too many people are benefiting from the way things have always been done in Greece to risk changing it, even for a promise of greater long-term growth. Seen that way, it's no wonder the guy they elected to represent them has so stubbornly refused to go along with the demands of Greece's creditors.

"Lots of things need to be done, but no government—this one or the previous ones—have been willing to do them," Azariadis says. "Some of [Tspiras'] predecessors claimed to believe in reform, but when push came to shove…they promised them but they never delivered. Reform is something that no political party in Greece really wants or is willing to go through with."