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Greece: the good, the bad and the downright ugly

The past week has been the most extraordinary in the 16-year history of the single currency.

On Tuesday Greece missed a €1.6bn payment to the IMF - the first developed country ever to do so.

Even before the missed payment, the Greek government had already called a referendum on the economic reforms demanded by the country's creditors and shut the country's banks after the ECB had cut off its emergency liquidity assistance - the flow of cash needed to pay nervous depositors withdrawing their money. An estimated €8bn has been pulled from the Greek banks since the middle of June.

So what exactly are Greeks being asked to vote on today? That's part of the problem.

The hard-left Syriza government of prime minister Alexis Tsipras says that Greeks are being asked to approve or reject the package of reforms demanded by the country's creditors in return for them releasing the final €7.2bn from the 2012 bailout, which expired on Tuesday night.

Mr Tsipras has called for a 'no' vote, which he argues will strengthen Greece's hand in negotiations on a new bailout that must, he insists, include a significant write-down of the country's €320bn debt mountain.

Not so, say the Troika of the European Commission, the ECB and the IMF, who pulled the deal they were offering when Mr Tsipras suddenly called a referendum. Greeks, they argue, are being asked to vote on a deal that no longer exists.

Accusing Greece of "egotism" and "betrayal" EU Commission president Jean-Claude Juncker said a 'no' vote would "look like Greece wants to distance itself from the eurozone". That is very close to telling the Greeks that a 'no' vote would be tantamount to the so-called Grexit.

Addressing the German parliament on Wednesday, Angela Merkel also took a hard line saying there would be no negotiations with Greece until after the referendum. "Compromise at any cost is not possible," she said.

These tough responses from Brussels and Berlin - not to mention the ECB's suspension of ELA to the Greek banks - point to a complete breakdown in trust between Greece and its creditors. After what has been said and done over the past week it will be very difficult for Greece to stay within the euro if there is a 'no' vote today - while a 'yes' would almost certainly bring down the Syriza government elected in January (Mr Tsipras and finance minister Yanis Varoufakis have already indicated that they will resign in that case).

So what happens next? Will a 'yes' vote usher in a new Greek government, a fresh deal with the creditors and an end to the seemingly endless crisis in the country? Will a 'no' vote send Greece hurtling out of the euro and plunge the Mediterranean country into an even deeper crisis as the return of the drachma unleashes hyperinflation, civil unrest and humanitarian disaster?

Bernard Connolly, the former European Commission economist whose 1995 book The Rotten Heart of Europe predicted many of the single currency's problems, believes that Greece will eventually have to leave the euro, either of its own accord or else be pushed out.

When the votes are counted, no matter what the result, the Greek government - regardless of its composition - and its creditors will have to sit down and start talking once again. After more than five years and two bailouts, things can't go on like this. The permanent Greek crisis is destabilising not just the country itself but the whole eurozone.

Even if the 'firewalls' put in place since the two previous bailouts have lessened the existential risk that the Greek crisis poses to the entire eurozone, the potential for an unforeseen accident with catastrophic consequences remains high.

From the point of view of Greece's creditors (if not the Greeks themselves) a 'yes' vote today followed by Syriza's replacement by a more centrist government is the best that can be hoped for - if not a good then at least a goodish outcome.

While neither the EU Commission nor the German government have called explicitly for Syriza's ouster, European Parliament president, German socialist Martin Schulz, stated on Thursday that: "New elections would be necessary if the Greek people vote for the reform programme ['yes'] and thus for remaining in the eurozone and Tsipras, as a logical consequence, resigns."

Given all that has happened this week it's hard not to suspect that Mr Schulz was merely giving public expression to the private views of Greece's creditors.

However, even if Greece does vote 'yes', it is going to need another bailout - its third, after the two previous bailouts in 2010 and 2012. Ideally, as the IMF's debt sustainability assessment recommends (see panel) and the Greek government has been demanding, such a third bailout should include a substantial debt restructuring.

But just because something needs to happen, there is no guarantee that it will happen.

Philippe Legrain, previously an economic advisor to former EU Commission president Jose Manuel Barroso, who was fiercely critical of the EU's response to the eurozone crisis in his book European Spring, points out that when the two previous Greek bailouts were being put together, Angela Merkel promised German taxpayers that they would not be left out of pocket.

"German taxpayers are not going to get their money back. Angela Merkel will want to push that decision onto her successor," he says.

This could result in more of the current policy of "extend and pretend" with Greece getting another stop-gap bailout. Any relief from such a bailout would be temporary, ensuring a rerun of this week's events in two or three years time.

With more than 85pc of its debts now owned by other EU governments - including the €350m which this country contributed to the first bailout in 2010 - any decision on whether or not to write down or extend the maturity of Greek debt is a political rather than an economic one.

Which is almost certainly part of the problem. Angela Merkel is not alone in wishing to avoid having to break the bad news to her voters that the money lent to Greece isn't going to be repaid. The surprisingly tough line taken by our Enda Kenny and Michael Noonan on the Greek crisis is almost certainly at least partially motivated by a similar reluctance to tell voters a couple of months before an election that our €350m has also gone for a Burton.

All of which means that even a 'good' outcome today - a 'yes' vote followed by the replacement of Syriza by a more compliant Greek government - could be undone by other EU governments' refusal to cut Greece slack on its debts. If that happens then Athen's creditors will have succeeded in snatching defeat from the jaws of victory.

For Mr Legrain the most likely outcome is what he calls 'Grimbo' - where Greece remains trapped in a financial limbo with unsustainable debts. And it would be grim. Even if the ECB resumes ELA and the Greek banks reopen, the country is on its knees. The Gfreek economy has shrunk by over a quarter since 2010 and unemployment has soared to 25pc - joblessness is over 50pc among young people.

How long can even the strongest democracy survive when subjected to such stresses? In January's election the hard-left Syriza won 36pc of the popular vote while the neo-Nazi Golden Dawn won 6pc - that's a combined 42pc of the vote.

And Greece isn't alone. The eurozone crisis has led to the rise of extremist parties on other member countries also, Podemos in Spain, Sinn Fein in Ireland and the National Front in France.

Mr Connolly fears the National Front could be the big winner from today's crisis. Its leader Marine Le Pen has vowed to pull France out of the euro and restore the franc on her first day in office if she wins the French presidential elections in May 2017.

As outcomes go, that counts as downright ugly.

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