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Greece will hold a referendum on euro deal July 5

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A demonstration in front of the Greek parliament in Athens.Photograph by Louisa Gouliamaki — AFP/Getty Images

After five months of desperate haggling with its creditors, Greece is to hold a referendum in eight days’ time on its future in the Eurozone.

The vote next Sunday could lead directly to Greece’s exit from Europe’s supposedly irreversible currency union. By doing so, it would send shockwaves through global financial markets and raise profound questions over the future viability of the euro, a project which has, more than anything else, symbolised the progress of European integration since the Second World War.

Prime Minister Alexis Tsipras made the announcement in a televised address after midnight on Friday, after his government decided at an emergency meeting that it couldn’t accept the terms on offer from the country’s creditors for unlocking the remaining billions in Greece’s bailout, which expires on Tuesday.

Without the money, Greece is almost certain to default on a €1.5 billion debt repayment to the International Monetary Fund that’s also due on Tuesday. It’s also unclear whether–even before that event, the government will have enough money to pay all the pensions and public sector wages that are due at the end of this month.

Tsipras and his cabinet took their decision after failing to persuade the country’s creditors (Eurozone member states, the IMF and the European Central Bank) to ease their demands on further tax increases and cuts to pensions, and to grant a measure of relief on the country’s crippling debts, which currently stand at over 180% of GDP. Debt relief and an end to such austerity were the key promises that swept Tsipras’ radical left-wing Syriza party to power in January.

“It’s obvious that the deal on offer from the creditors is beyond the limits of the mandate that the government has,” Constantinos Chrysogonos, a Syriza member of the European parliament, told the BBC’s Newsnight program.

Tsipras had already warned a month ago that he might resort to a referendum if he couldn’t get a deal he believed in. Recent opinion polls have suggested the people would rather accept more austerity than lose the euro, but whether that mood will hold under the pressure of impassioned government campaigning against what it calls national humiliation is another matter.

It isn’t yet clear how the referendum will be worded. However, the vote will essentially be on whether to accept the creditors’ final terms which were outlined Friday. The proposal detailed how Greece would get access for the next five months to €15.5 billion ($17 billion) in loans. German Chancellor Angela Merkel Friday called the terms “extremely generous”, while Tsipras described them as “blackmail”.

 

Greek television reported that Tsipras has asked Merkel and French President Francois Hollande to extend the current bailout for a week, so that the referendum can be held in relative calm.

However, pressure has been mounting on Merkel in Germany to cut Greece loose, not least from her own central bank head and former adviser, Jens Weidmann.

The ECB has been deciding on a day-by-day basis on whether to keep an €86 billion short-term credit line to the Greek banking system, as people have withdrawn euros from the banks in order to protect them against being redenominated in a new drachma.

“Tomorrow is going to be a bloodbath for the banks,” said Megan Greene, chief economist with Manulife, in e-mailed comments.

Figures released by the ECB Friday showed that deposits in Greek banks fell to an 11-year low in May, while Merkel hinted at a re-run of the 2013 bailout of Cyprus, where the government caved to pressure from the creditors after the ECB forced the banks to shut their doors.

The Eurozone’s 19 finance minister are due meet again Saturday, but it’s unclear whether the meeting has any point now.