Democracy has prevailed. But it is still not clear whether Greece will be consigned to exile or will force the creditors to make concessions.
The consequences of exile for Greece have not been fully quantified but for sure both Greece and her creditors will have a new financial, political and social crisis.
Meanwhile, serious concessions will open the flood gate for left-wing rebels in Spain, Italy and other austerity-constrained countries. Acceptable concessions to Greece will need to include debt write-down and curtailment of reforms.
Either way, the crisis will move to Germany, where Germany’s Chancellor, Angela Merkel must take politically difficult decisions. An exit for Greece has a popular mandate in Germany but the financial cost to Germany will be catastrophic. It will likely push the Eurozone into deeper recession, increasing unemployment. Meanwhile, concessions from Germany will signal the end of Germany’s financial control over Europe – giving major concessions to Greece could be deeply damaging politically to Merkel’s government.
The next major decision will be with the ECB, Monday afternoon. If the ECB follows orthodoxy from Germany, it will tighten the screws on Greece, and probably precipitate a banking crash in Greece – this could well trigger the exit. The alternative will be for the ECB to increase support for Greece but this will severely weaken the negotiating hand for the creditors.
Personally, I think that austerity policies have been too deep and prolonged and it’s time to try an alternative. However, there are serious risks in ignoring the ‘rule-book’.