Singapore - A referendum on the euro zone

The central problem with the euro zone has been the political one. Economies have to be at comparable stages of development for their integration to be successful.

For a currency union which is an advanced form of economic integration to work, a commensurate degree of legislative integration would appear to be necessary.

In its absence, there is a misalignment between economics and politics. This mismatch might lie dormant and be tolerable during ordinary times, but comes glaringly to the fore in a crisis.

This is exactly what has occurred with Greece's proposal to hold a referendum on its second bailout package.

The euro zone is a currency area that is not underpinned by a common legislative authority empowered to take financial decisions, particularly on taxation. Hence, bailout plans for Greece proceeded in the face of political scepticism and even hostility in richer European nations whose citizens saw themselves as paying to rescue the Greeks.

Now, many Greeks see themselves condemned to a lifetime of austerity by rescue efforts which will translate into public sector pay cuts, tax hikes and smaller pensions. With the bailout package, crafted laboriously in recent weeks, running into such opposition at home, Prime Minister George Papandreou - rather than bite the bullet and stay the course - has staked his political future and that of Greece in the euro zone, on a referendum.

The electorate will be asked to decide on the future of the rescue deal. A failure to accept it will have grave economic implications not only for Greece but also for Europe's other anaemic economies - and markets worldwide. A measure of European anger at Greece's referendum decision was seen in the communique by the leaders of France and Germany, who declared they were "determined to ensure the implementation without delay" of decisions adopted at the euro zone summit as these were "more necessary than ever today".

The political pulse in Greece, however, is beating very differently. In a Greek tragedy, all this would probably be anagnorisis - the protagonist recognising the nature of his own predicament. But in the euro-tragedy that Greece has now become, the plot seems fated to keep turning till some terrible denouement happens.

Financial markets have reeled on very real fears that the referendum move will result in a Greek default.

But the larger issue that the Greek decision has surfaced is whether the euro zone can be sustained at all. Fears of a contagion spreading to Italy and Spain should focus European minds. Europeans clearly need to reform a currency zone whose workings are out of sync with the realities of their integration.

News Desk

The Straits Times

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