24 Hours in the Eurozone

It’s been a busy 24 hours for the eurozone. Although unexpected, the announcement Thursday of a 25-basis point cut to the ECB overnight lending rate by new ECB President Mario Draghi was the least of the news.

Late Wednesday, German Chancellor Merkel and French President Sarkozy—no doubt vexed by Greek Prime Minister Papandreou’s backpedaling from the recently inked troika debt plan—slammed the door on the possibility of additional aid for Greece without (prompt) approval of the bailout package by the Greek Parliament or (very prompt) public approval in a referendum. Likewise, they suggested failure to approve the new package might signal it’s time for Greece to leave the euro—although no provision for a country’s exit exists in eurozone treaties. Who can blame Sarkozy and Merkel, really? Papandreou may have been trying to curry political favor domestically, but both Merkel and Sarkozy (among numerous other eurozone leaders) have also spent considerable domestic political capital in reaching a deal.

Faced with Sarkozy and Merkel’s ultimatum, the opposition New Democracy party in Greece agreed to support the troika’s bailout package. That about killed the idea of a popular referendum, though that may not matter for Papandreou. At this point, much of his political clout has been exhausted, and the likelihood he loses the upcoming confidence vote has risen considerably. His ruling PASOK party is down to a slim majority of 151 votes (of 150 needed) to pass a measure without opposition support. Papandreou’s losing is not a done deal—he’s won several confidence votes in the past 18 months and could again. But the likelihood he loses seems higher now—meaning new leadership in Greece is quite possible in the short term, although terms of the new bailout agreement will still likely be approved.

Relatedly, Greece revealed it currently has sufficient funding to make it through mid-December—differing from previous forecasts it could only last until November without an additional tranche of aid from the troika. Should Greek politicians consider more foot-dragging (very likely), Merkel and Sarkozy have set a deadline of December 4 or 5 for a decision on the bailout package (although our guess is, if it seems like Greece is moving in the right direction, that fairly arbitrary deadline becomes more arbitrary).

Despite the political turnover and potential for continued rancorous debate in the eurozone, politicians there still are committed to maintaining the euro. (A position the Greek populace overwhelmingly still supports.) So, the Greek referendum has been scrapped, at least as Papandreou imagined it. Merkel and Sarkozy made it clear—accept the bailout or leave the euro. Which isn’t really much of a choice. Not for Greece right now.