Today, the people of Greece cast a historic vote on their place in Europe. And while the final results haven't been announced yet, all signs point toward a "no" vote. According to the AP, Greece's Interior Ministry is predicting that "no" will win with about 61 percent of the vote.
The Greek Ministry of Interior shows similar results: the "no" ahead by a 61-39 margin with 59 percent of the vote counted. This isn't a random sample, so the results could change as the counting continues. But projections from Greek media organizations agree with the Interior Ministry projection showing a no vote.
If the Greeks had voted "yes," it would have meant more spending cuts, more tax hikes, and more rounds of tense negotiations with European creditors. Instead, Greeks seem to have voted "no," which will likely trigger a Greek exit from the Eurozone. That will cause turmoil for the Greek economy in the short run, but could ultimately give Greece more control over its destiny.
What are the Greeks voting on?
Officially, the people of Greece were voting on whether to accept a June 25 offer from the International Monetary Fund, European Union and the European Central Bank (collectively known as "the Troika") to provide Greece with desperately needed bailout money. In exchange, the Troika demanded that Greece implement a list of tax increases, spending cuts, and economic reforms.
In practice, the vote was widely seen as a referendum on whether Greece should continue being part of the Eurozone — even if it means submitting to what many Greeks see as onerous financial conditions. Euro membership isn't officially on the ballot, but a no vote makes Greek exit from the common currency a lot more likely.
Yet figuring out exactly what the referendum means — and what will happen as a result of a no vote — turns out to be surprisingly difficult. The Greek government itself hasn't laid out a clear plan for what will happen in the event of a no decision. Indeed, they've claimed that a "no" vote will allow them to secure a more favorable deal from European creditors, something most independent observers think is unlikely.
How will a "no" vote play out in Greece?
Greece's basic problem is that Greece is such a bad credit risk that no one other than the Troika are willing to lend it money. So if Greece walks away from the table, it's going to have to immediately find some other way to plug the huge hole in its budget. And all the options are bad.
One option would be spending cuts and tax hikes even bigger than the ones the rest of Europe has been demanding. This is likely to be a non-starter for the party that came to office campaigning against austerity.
Another option would be for the government to begin paying domestic expenses with IOUs instead of euros. These IOUs would function as a second currency, circulating alongside euros in the Greek economy, but worthless outside of Greece. In theory, this could provide the Greek economy with much-needed liquidity without Greece formally leaving the Eurozone.
In practice, however, this would likely just be the first step toward leaving the Eurozone. Anyone who has a choice in the matter would insist on being paid in euros instead of IOUs, so euros would gradually leak out of the Greek economy. The Greek government would be forced to print more and more IOUs, until they became the country's de facto currency. And while the government might declare them to have equal value to euros, the market is unlikely to agree.
Greece could also save money by halting payments to its creditors, defaulting on its debts. But this path won't be easy. It would likely trigger an even larger financial crisis that could further cripple the Greek economy.
Ultimately, then, rejecting the deal offered by the Troika is a first step toward Greek exit from the European common currency. The ultimate result would be the introduction of an independent Greek currency, perhaps called the drachma. Greece might convert its euro debts into debts denominated in drachmas, allowing the country to pay those debts off with depreciated currency.
Would leaving the euro be bad for Greece?
Leaving the euro would be a disaster for Greece. The problem is that other options would be pretty disastrous too.
In principle, leaving the euro and bringing back the drachma could have substantial macroeconomic benefits. By printing more drachmas, Greece could boost demand and bring down interest rates, stimulating investment. A devalued drachma could also make Greek exports and tourism more attractive.
However, devaluation wouldn't be a panacea. The Economist notes that trade is a modest share of the Greek economy, and Greece has already cut wages with little positive results.
Leaving the euro would also create some serious headaches for Greek policymakers. Right now, most contracts in Greece are denominated in euros. Re-writing those contracts in drachmas would spark years of litigation. And abandoning euros would mean the Greeks would pay higher interest rates for years to come.
Yet leaving the euro could also have long-term benefits. For the last few years, Greece has been suffering economic conditions as bad as America's Great Depression, and the tight monetary policy of the European Central Bank deserves much of the blame. By creating its own currency, Greece would ensure that its leaders have a greater ability to respond next time Greece suffers an economic downturn.
What would have happened if the Greeks had voted yes on the referendum?
A "yes" vote would have signaled that the Greek people wanted to remain in the Eurozone even if it meant accepting the demands of the Troika. That outcome could have allowed Greece to quickly secure another round of financing, albeit on terms many Greeks would find odious.
It could also have triggered the downfall of the Greek government under the Syriza party. Prime minister Alexis Tsipras has campaigned for a "no" vote, and Tsipras's finance minister, Yanis Varoufakis, vowed to resign if the Greek people voted yes.
So a "yes" vote would likely have brought to power a new government that was more amenable to accepting the Troika's demands. And many of the reform ideas in the Troika proposal would actually have been good for Greece. Greece has a corrupt and dysfunctional tax system badly in need of improvement. Its civil service suffers from widespread patronage.
But none of this is news to Greek leaders. They know that a fairer and more efficient tax system and a more competent civil service would greatly improve the finances of the Greek government. But these are systemic problems that are difficult to solve even if Greek leaders want to solve them. And while it may be true that the Greek pension system is too generous given Greece's level of economic development, many economists believe that sharp cuts in government spending during a recession will make a bad economy even worse. That's especially true if Greece stays in the Eurozone, because it won't be able to offset spending cuts with looser monetary policy.