Economist Paul Krugman applauds decision to hold referendum on bailout deal


Athens - Paul Krugman, the American liberal economist, has been consistently critical of the austerity program demanded by the Troika as a condition of releasing the final funds of the Greek bailout that expires on June 30.
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Krugman in his New York Times blog notes that until now every Greek government has given in to the demands of the Troika no matter what they had said during the election. Krugman refuses to use the term "institutions" to refer to the European Commission, European Central Bank(ECB) and the International Monetary Fund(IMF) or Troika. After the Greek government refused to meet with the Troika after being elected, they were rebranded as "institutions" presenting the radical Syriza government with at least a linguistic victory. Krugman's refusal to go along with this game is refreshing.
The continuous caving in to Troika demands has damaged the credibility of centre-left parties and no doubt is a factor in the success of Syriza, a more radical leftist umbrella group. Krugman suggests the Troika thought that the Syriza government would abandon most of its anti-austerity program or the government might fall. The Greek government did abandon most of its austerity program and almost all of its red lines. They have followed the usual pattern. However, the Troika has pressed for more and abandonment of any red lines. It is as if they needed to humiliate the party to show that a radical leftist party is helpless. They must be taught to respect their superiors.
The call for the referendum should have been a wakeup call for the Troika. It was not but an occasion for the usual moralistic blather about Tsipras being irresponsible. Krugman thinks that Tsipras did the right thing. Krugman has been arguing that the Troika has been doing the wrong things all along. In fact, he claimsthat if Grexit happens, it will be because the creditors, especially the IMF wanted it to happen. This may be correct but there are certainly risks for the eurozone and Troika if there is a Greek exit (Grexit) from the zone. If Greece defaults on debt payment the ECB and IMF will suffer huge loan losses. There is also the possibility of contagion. If over the longer term Greece recovers and grows, this would encourage resistance to austerity and the rule of the Troika in other countries. The Troika must hope that somehow they will persevere without yielding much if anything even at this late stage.
Krugman approves the referendum for two main reasons. First, a referendum will give the Greek government democratic legitimacy in any future negotiations. Most Greeks are still very much for staying in the zone it seems even if their anti-austerity demands are not meant. However, given the recent increased demands and the fact that Syriza, and no doubt other parties such as the Communists, will campaign for a rejection of the Troika proposals there is no guarantee it will pass. Even if it does pass and a deal is then negotiated it would not be a long term solution to the Greek problem but kicking the can down the road again until another bailout is needed. Meanwhile social discontent might rise to the boiling point. Krugman claims that democracy still matters in Europe. Of course it does not when it comes to the power of the Troika over individual countries. The referendum is the exception not the rule. Krugman's second reason for approving the referendum is that it will solve the dilemma that the governing party Syriza faces. Syriza faces citizens who voted for anti-austerity measures but are not willing to leave the euro zone. Syriza has achieved very little if anything in the way of relief from austerity policies and so it is now quite fitting that they should ask Greeks whether they want to bow to the Troika demands and accept their offer or to turn it down. This will provide Tsipras a mandate to cave as others have done or to develop a plan B for default and possible exit from the euro zone.
Many critics have argued that a plan B should have been planned long ago when it became obvious the Troika was giving little or nothing to satisfy demands for relief from austerity. The negotiations were filled with bluster, useless rhetoric, and false optimism that a deal was close. Having the referendum at this late date creates huge problems for Greeks that would not have been as severe were it held much earlier, say on the earlier proposals of the Troika. If held then there would not have been a huge payment coming due as that to the IMF the end of June, days before the referendum. The move to hold a referendum and the lack of a plan B show that Syriza is guilty of poor planning or perhaps no planning at all. Now Greeks face a bank holiday on Monday and capital controls. In the appended video from January of this year, Krugman was even then predicting a Greek default on its debt well before the election of Syriza.

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