On July 5, the Greeks voted no. No to the austerity measures demanded by Greece’s lenders in return for loans. No to making any compromises with the European Union. No to turning around the Greek economy. And no to fundamental and long-overdue institutional reforms of the Greek state.

In short, Greeks said no to turning Greece into a modern and competitive country.

Alexis Tsipras, Greece’s radical left-wing prime minister, had campaigned for a no vote in Sunday’s referendum on whether to accept the terms of a new international bailout package. So he was naturally jubilant over the result, in which over 60 percent of the voters turned their back on the EU.

Judy Dempsey
Dempsey is a nonresident senior fellow at Carnegie Europe and editor in chief of Strategic Europe.
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Not that Tsipras interpreted it that way. He tried to put the best spin on a result that could inflict even further damage on his country. He said it was not a vote against Europe. Instead, he maintained, the vote would allow Greeks greater leverage in their negotiations with the International Monetary Fund, the European Central Bank, and the European Commission. He could now return to Brussels with a much stronger hand.

Were it as easy as that. The other eighteen eurozone countries are in no mood to be blackmailed by Greece. That is how several of them see it. The Greeks, for their part, believe that Angela Merkel, the German chancellor, and Wolfgang Schäuble, her finance minister, never wanted to give ground over the extent of Greece’s austerity measures. Schäuble had been demonized by the Greek popular press.

Yet the leaders of the other eurozone countries have been just as tough on Athens. Latvia, which almost went bankrupt during the 2008 financial crisis, was in no mood for making concessions to Greece. This Baltic state bit the bullet by introducing radical reforms to overcome the crisis. So did IrelandSpain, and Portugal. Slovakia recently introduced major changes to its labor law by postponing the retirement age.

Having introduced and endured such hardships, are these countries really prepared to soften the terms for Greece? Were they to do so, then their own electorates could turn around and ask why they had to accept such harsh terms in the first place.

The reality then and now is that these countries knew they had to modernize their economies by introducing more flexibility, more oversight of their banks, more transparency, and a restructuring of their state institutions.

The short-term impact of such reforms has been high unemployment, especially among the youth. The parliamentary election in Spain that takes place later this year will reveal the full impact of Greece’s no vote. The populist Podemos party, which opposes Spain’s own austerity measures, will surely try to exploit the Greek result.

Greeks said no to turning #Greece into a modern and competitive country.
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Yet the Greek no also has much wider and more strategic implications for Europe. Eurozone leaders, who will hold a summit in Brussels on July 7, will have to decide if it is worth letting Greece default and, by implication, allowing the country to leave the eurozone.

Much has already been written about what that would mean for the Greek economy and the hardships that would follow. The EU could even be forced to provide humanitarian assistance to Greece if the country can no longer afford essential food and medicines. That shows the depth of the Greek economic and social crisis.

If, however, eurozone leaders made some compromises over Greece’s debts, Tsipras’s gamble of holding a referendum would no doubt be vindicated. But any compromise without major institutional reforms would delay Greece’s transition to a strong, modern, and competitive economy. Any compromise that did not address the need for governance would undermine the legitimacy of monetary union.

After all, that union was set up on the basis of stringent rules on budget deficits, a tight monetary policy, and low inflation to make Europe competitive.

Several countries, including Germany under the former Social Democratic chancellor Gerhard Schröder, flouted those rules. The European Commission as well as other member states lacked the courage and commitment to take Berlin to task. At least Schröder, who saw how the German economy had become the sick man of Europe, then went on to introduce major reforms to the labor market, a decision that cost him Germany’s 2005 parliamentary election.

It is reforms like these and many others that Athens was being asked to implement to turn around its economy. None of these issues was raised during the short run-up to the July 5 referendum. None of these issues was ever tackled at all by Tsipras since he became prime minister in January 2015.

It is hard now to see Tsipras ever considering such fundamental changes to the Greek state. The longer the delay in addressing the acute deficiencies in Greece’s state structures, the greater the risk that Greece could mutate into a failing state.

The Greek no has wider and strategic implications for Europe.
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The strategic implications of such a slide would be immense. Greece’s democratic institutions would have to be strong enough to withstand the rise of ultranationalists and Euroskeptics. The institutions would have to resist pervasive corruption even as investment dried up.

As if that were not enough, Greece’s stability would be called into question. This part of southern Europe is already vulnerable and exposed to the turmoil in the Middle East, to the refugee crisis, and to the Western Balkans, whose leaders can only look with trepidation at what is happening to Greece and the EU. Somehow, neither eurozone leaders nor Tsipras have been prepared to see the bigger picture.

Maybe the resignation on July 6 of the Greek Finance Minister Yanis Varoufakis—who did everything possible to destroy the trust between Athens and its international creditors, particularly Berlin—might provide a glimmer of hope in the coming days. It’s a big maybe. If not, the future of European political and economic integration could be doomed.