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Why can Greece hold a Referendum on its Bailout?

November 2, 2011

One of the major problems of the European Union is that it has ambitiously attempted to institute policies of federal county when in fact it is still a confederation.  The euro is the perfect example of this, as a group of 17 countries have agreed to give up their national monetary policy in return for the euro.  That is the federal aspect of the project.  The “confederal” is the 17 member states still retain national sovereignty.  As a result, Greek Prime Minister George Papandreou is definitely within his rights as head of the Greek government to call a referendum on the latest bailout.

This decision was no doubt the result of Greek domestic politics, but the effects of Mr. Papandreou’s decision reverberated well beyond Greece.   As the New York Times and the BBC reported, stock markets across Europe plunged on the news of the proposed referendum.    The news also wiped out much of the gain the euro made against the dollar in the led up to last week’s bailout package and the spread on the interest rates between Italian and German bonds reach their highest levels yet.  Thus, a Greek decision—the country accounts for 3.4% of the Eurozone’s population, 2.6% of its GDP, and about 4% of its total government debt—is place immense strain on the finances of much larger countries such as Italy.

I have already outlined some of the structural flaws of the EU in dealing with the European Debt Crisis in the blog “Slovak Vote Reveals Euro’s Underlying Problems,” but Mr. Papandreou’s announcement of a referendum adds a sixth structural problem (which is really the most important):  Member states retain sovereignty.  While 17 or 27 heads of government can meet and agree on a bailout, the member states can still derail plans that might benefit the whole for their own gain.  While many analysts like to make comparisons between the Eurozone and the US, it is clear in the US that the Federal government reigns supreme.  When the Federal government intervened in 2008 after the collapse of Bear Sterns, the 50 states had very little say in the policies, and could not cause the chaos of Greece’s action yesterday.

Thus, while Mr. Papandreou was called to Cannes, France to meet with Germany’s Angela Merkel and France’s Nicholas Sarkozy tomorrow, it is not clear how persuasive the can be.  Instead, The Economist reported yesterday, all of Europe might have to wait for Greece internal politics to play itself out and solve the new crisis—one way or another.


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