The Only Hope for Greece

French President Nicolas Sarkozy and German Chancellor Angela Merkel emerged from emergency talks Wednesday where there was just one topic on the agenda: Greece.

They’d summoned Prime Minister George Papandreou to explain himself for having "outrageously" announced that he would let the Greek people vote on their continued membership of the Eurozone and, more specifically, whether they’re prepared to accept greater austerity as the price for continued financial support.

Only in Brussels could the thought of consulting the populace be more controversial than deliberately rigging your economic data to get into the Euro in the first place.

Have no doubt about it, Greece is bankrupt. Without the billions of dollars that the EU and IMF are pouring into Athens, Papandreou’s government couldn’t pay their bills. But there is no such thing as a free lunch, and Greece has had to impose some of the most stringent austerity measures in Europe to get the cash.

Many of these reforms—raising the retirement age, cutting its bloated welfare state, reducing over-generous public pay— are much-needed, but there is no economic growth to cushion the austerity blow. Daily rioting on the streets of Greece have left three people dead. It makes the Occupy Wall Street demonstrations almost look like a knitting circle.

For nearly two years, EU leaders have sought to avoid their worst-case scenario: a Greek default on its debts. Although Greek bondholders are being forced to take a 50 percent haircut because Athens can’t pay back the money it borrowed, Europe has managed to avoid using the dreaded D-word. But financial semantics aside, the Eurozone can’t hide the ultimate truth: the Euro is a busted flush.

It’s not that the single European currency won’t work; it’s that it can’t work as currently configured.

There is no nation called "Europe"; there is no European citizenry that is willing to see tax-payers dollars federally transferred to prop up weaker members of the Eurozone, and there’s relatively little labor mobility within the Eurozone.

When the U.S. census recently revealed Detroit’s catastrophic decline over the last decade, it also showed that most of those workers flagged a bus and headed for Houston. It’s a lot harder for Athenians to head to Estonia for work.

Today, it appears as if Merkel and Sarkozy have gotten their way and the short-lived proposal for a Greek referendum will be scrapped. And it is easy to see why the EU wants to avoid referenda at all costs.

When EU leaders (including Sarkozy) have gone to their populations in the past and asked them to approve of further EU integration, they’ve been repeatedly told “No!”

But time and again, referenda across Europe have been brushed aside—even in contravention of EU law—and peoples have been told to vote again and again until they get the right answer.  -- Such is the breathless arrogance of the European Union that an official once told me, “Sometimes you have to subvert democracy to get more democracy!”

If Greece is to have a chance of returning to economic growth anytime within the next decade or longer, it must leave the Euro and devalue quickly—referendum or not. After all, the $177 billion deal currently on the table is only projected to get Greece’s debt-to-GDP ratio to 120 percent by 2020. (The Eurozone’s original “rule” was that nations should not exceed a 60 percent ratio.) Greece has an over-valued currency, and inside the Euro, it cannot compete with its more efficient and more productive northern partners. It needs the Drachma back.

Greek sovereignty—and its national currency—must be restored in a rational, predictable manner. And what’s wrong with a bit of old-fashioned democracy too? If EU elites had sought a popular mandate on the creation of the Euro in the first place, it’s unlikely that they’d be in this mess now.

However, the EU’s seems wholly committed to staging another “muddling-through” summit in Cannes this weekend. But you can’t buck the markets forever. So, buckle-up—the entire financial trading system is in for rough ride.

Sally McNamara is senior policy analyst of European affairs at The Heritage Foundation’s Thatcher Center for Freedom.