So at what point does Greece just become a German colony?

A few days ago I was talking about the subtle, hidden ways in which sovereignty was being eroded during the European debt crisis, with the possibility of hedge funds taking Greece to the European Court of Human Rights. Today comes news that sovereignty is also being eroded in remarkably blunt, in-your-face ways, via FT reporting on Germany’s latest proposals for conditions on the Greek bailout. The German plan essentially calls for Greece to give up control of taxing and spending decisions, through the appointment (by the other Eurozone members) of an outside “budget commissioner” responsible for overseeing “all major blocks of expenditure” of the government.

This is obviously a pretty huge blow to sovereignty, and the German proposal is (rightly) being met with considerable shock. Control over the budgeting process is one of the key pillars of sovereignty and autonomy – it’s no coincidence that debates over how much autonomy “autonomous” regions within states should be granted generally come down to debates over who controls the purse strings. So will the Greeks sign on to this, or will the Germans back down? At this point neither seems all that likely (though the Germans backing down is probably the more likely of the two), which means the likelihood of a Greek default/euro exit just went up…

I think it’s particularly interesting to compare this episode to the last time we were face-to-face with a real likelihood of Greece’s Eurozone exit, then Greek-PM Papandreou’s call for a national referendum over proposed bailout terms in November 2011. This was also met with shock, and ultimately led to his resignation and the installation of current technocrat PM Papademos. At the time Papandreou’s move was widely seen as a mechanism to pave the way for a Greek default and possible euro exit since, as a general rule, publics don’t vote for wage cuts and endless austerity. Similarly, today it’s easy to view Germany’s stance as ultimately aimed more at speeding along a Greek default, as it’s difficult to imagine any state giving up control over taxing and spending to an outside commissioner. This isn’t necessarily a nefarious, cynical move; Germany is being clear about the severity of the situation and the trade-offs involved, and if of the available options default and euro exit is the least bad, then let’s hurry up and get to the end-game already.

But the contrast in the “non-default option” of these two episodes is striking. If the Greeks had voted in a referendum to accept austerity and endorse the bailout terms, then the government would have had popular legitimacy to go ahead and enact steep cuts, and some hope that these would actually be realized and carried through throughout the country. This isn’t to say there wouldn’t be any protests or anything, but a successful referendum would have empowered the government – and critically non-elected public servants – to push forward, and the population would be more likely to swallow the tough medicine they’d voted for.

Conversely, trying to get to austerity by completely stomping on sovereignty is not only a disaster for anyone who cares about democratic legitimacy, but perhaps more to the point probably isn’t even going to work that well. The thing is, austerity without political buy-in is extremely difficult. While an outside commissioner could force austerity-friendly legislation, getting the laws passed is but the first step; what happens next? Do the public servants actually follow through and enforce these laws, identifying spending cuts rather than just stonewalling? Will the public actually pay more in taxes, rather than just finding even more creative forms of tax evasion? No matter how much power is officially vested in the German budget commissioner, at the end of the day a lot will still depend on changes in the behaviour of individual taxpayers and government workers. And, of course, as the power of the foreign budget commissioner increases, these latter groups will be less and less inclined to go along with what s/he says. (Hat tip on this point to the excellent Megan Greene, who really should blog more often.)

I always thought Papandreou’s call for a referendum was something of a political masterstroke, even if it was likely to fail and accelerate Greece’s eurozone exit. The further we go down the current path – as it becomes increasingly obvious we need to get off this route yet each off-ramp looks worse than the one before – I predict many will come to see the referendum that wasn’t as a missed opportunity…