By Marianna Fotaki*, University of Warwick

Greece will hold a referendum on July 5 on whether the country should accept the bailout offer of international creditors. The government’s decision to reject what was on offer and call the referendum is ultimately an attempt to take charge of its domestic policy and reaffirm its credibility with voters.

Although Greece is hard strapped for cash this is clearly a political decision with profound consequences for the future of the European Union. It is also the right one.

This is not merely useful as a negotiating tactic for obtaining a better deal with its creditors, as many commentators might suggest. The coalition of the left, Syriza, had no choice but to oppose further measures that would lock its economy into a deflationary spiral, the trappings of which are destroying Greek society.

The Greek position

Elected with the mandate to end the savage austerity policies already imposed, Syriza could hardly accept the further cuts demanded. These include cuts in income support for pensioners below the poverty line and a VAT hike of up to 23% on food staples. Even more onerous was the demand that Greece should deliver a sustained primary budget surplus of 1% for 2016, gradually increasing to 3.5% in the following years when its economy has already been contracting for six years.

By most counts the austerity policies imposed by Greece’s creditors in 2010 in exchange for the bailout money (of €240 billion) have been an abject economic and moral failure. The International Monetary Fund itself has acknowledged “a notable failure” in managing the terms of the first Greek bailout, in setting overly optimistic expectations for the country’s economy and underestimating the effects of the austerity measures it imposed.

The former IMF negotiator, Reza Moghadam, has acknowledged the fund’s erroneous projections about Greek growth, inflation, fiscal effort and social cohesion. The debt is now almost 180% of Greece’s GDP, up from 120% when the bailout program began. And this is mainly due to the fact that GDP has contracted by 25%, rather than the significantly lower projections by the IMF. The shrinking of the economy and rising unemployment levels have exceeded those that hit the US in the financial crisis of the 1930s.

The human and social costs have been even more staggering in Greece. Incomes have fallen by an average of 40%, and the unemployment rate reached 26% in 2014 (and higher than 50% for youth). With hundreds of thousands of people depending on soup kitchens, and thousands of suicides in the years 2010-2015, the moral case for debt forgiveness seems just as strong as the technical one based on economics.

The creditors’ offer

Yet in the terms presented to Greece by their creditors there is no commitment to reducing Greece’s crippling debt (which all commentators acknowledge is unrepayable). Nor is there any tangible proposal for rebuilding the Greek economy.

Germany, France, and the EU, aided by the IMF and ECB, continue to insist on implementing policies that have so manifestly failed Greece. They do so to avoid having to justify the massive bailouts of their own financial systems – shifting the burden from banks to taxpayers – if Greece fails to make the repayments. The leading EU partners must not be seen to act leniently towards Greece as this might encourage anti-austerity parties Spain and elsewhere.

Broken Europe

But the social and political costs of these policies have put the legitimacy of the entire European integration project in question. By being locked into austerity policies, Europe is tearing itself apart.

This brings to the fore the faulty institutional framework that has exacerbated these issues. European integration was conceived by a set of elites, while many EU citizens have never fully embraced the idea: the EU tends to be regarded as an economic entity rather than a cultural or social one. The “ever closer union” remains an aspiration, while EU institutions patch up compromises between its most powerful members.

The ill-thought and haphazard implementation of the common currency is perhaps the most costly compromise of all. The Greek government is therefore right to ask for generous debt relief to allow the economy to have a fresh start in exchange for reforms that will address the perennial problems of corruption and inequality that bedevil Greek society.

The right decision

Greece has many problems – including unfair taxation (64% of taxes are paid by salaried employees and pensioners), corrupt elites who have governed the country for at least four decades with fellow European governments repeatedly turning a blind eye to their flouting of rules, and the oligarch-owned media which are neither independent nor free. But accepting the bailout would only feed into the system that got Greece into this crisis.

Meanwhile, the newcomer to Greek politics, Syriza, has been told it will only receive the funds agreed under the previous bailout terms if it is ready to implement further policies that will decimate the poor and impoverish the middle class even more. Cutting pensions, many of which are already below the eurozone average when almost one in two of them are facing poverty, would be a mistake.

So would conceding to the firing of an additional 150,000 public sector workers when their overall headcount has already been reduced by 161,000 since 2010 – a 19% reduction, according to the IMF.

Contrary to popular belief, the number of public sector employees as a percentage of the workforce in Greece is 14% below the OCED average, but austerity has had an even more disastrous impact on employment in the private sector, with an estimated 400,000 businesses closing down in the past five years.

No country has ever succeeded in emerging from financial crisis by means of austerity. Further austerity would have made the impossibly bad situation that Greece is in worse still. In rejecting the creditors’ further demands, the Greek government stands for the working people of Greece – and Europe too.

*Marianna Fotaki is Network Fellow, Edmond J Safra Center for Ethics, Harvard University and Professor of Business Ethics at University of Warwick. This article first appeared on The Conversation.


  1. “No country has ever succeeded in emerging from financial crisis by means of austerity.”*
    *Citation needed

  2. only that this austerity is self inflicted by utter incapability addressing greek shortcomings for decades …

  3. Greeks have no idea of the details and contents of the offer and the majority by far are not qualified to make a judgement. This is why they attempt to elect representatives who are responsible enough to analyse and make the correct decisions. Sadly the electorate was duped by these tricksters who are bent on destroying the country. This vote is an exercise in futility as its legal basis is highly questionable, especially after 30th June.

    This so-called professor and expert is like all her soul mates in Syriza high on philosophical issues and theory but low in practical common sense. He nonsensical writing on the contrary is a defence of a group of individuals who have displayed erratic judgment, are irresponsible and most have never worked a day in their lives. I do not have time to waste going into further detail regarding her comments.

  4. Thank you. You are correct. The solution to this problem is easy which I have been saying for months. The Greek laws regarding businesses discourage growth and profit. Without profit, businesses do not expand. If businesses do not expand, no employment gains.

    I have never witnessed such stupidity, and incompetence, in my 40 years of business. 90% of all Greek people have no idea what is about to hit them.

  5. Tsipras, is incompetent, inexperienced, and has no education, nor management skills in finance, and economics. Simply put, Tsipras has no idea what he is doing, and it shows. This goofy referendum vote, is due to Tsipras coming to the realization, he is in way over his head. If the people vote no, he can’t be blamed for the disaster that is about to hit Greece. If Greeks vote yes, Tsipras will just claim he wished he had known, because he thought he was elected because Greeks wanted no austerity.

    Tsipras, is a snake oil salesman.

  6. Tsipras is a schoolboy politician who’s never grown up. Snake oil salesman? You’ve hit the nail on the head.

  7. “The author of this article claims to be from a university. I am highly educated, and the first thing I learned when I graduated from a university, was how little knowledge you learn in universities about real world problems.”

    There is another explanation for that, maybe you didn’t learn much from an university because you didn’t really learn much at all.