TIME world affairs

Greece’s Referendum Was Still a Good Idea

While it certainly won't save the economy, the vote at least may have prevented social and political upheaval

After Greek Prime Minister Alexis Tsipras called for Sunday’s vote on whether Greece should accept the austerity measures its creditors are demanding, the international reaction was nearly universally negative, with the leftist Greek leader accused of engaging in demagoguery at the expense of his nation. The criticism has even made its way to Urban Dictionary:

Greek Referendum

Noun. An act of intense self-destruction. A suicidal act. Usually harms many people, not just the person committing the act. Often causes those witnessing the act to facepalm or exclaim in a loud voice, “Why?”

The average Greek citizen is not a political economist or an expert in international finance, which means most eligible voters weren’t nearly knowledgeable enough on the technical financial issues involved to make an informed decision—certainly not as informed as the government they elected to make these decisions. Nevertheless, the mere fact that Greek citizens were given a choice means that the Greek referendum might actually be good for the country in the long run.

Going into the vote, Greece faced two very bad options. On the one hand, it could turn down Europe’s bailout proposal, reject the attached austerity measures, and face the wrath of its creditors. This would destroy Greece’s credit rating for years and probably lead to the country’s exit from the European Union, which would in all likelihood trigger massive capital flight, inflation, and all sorts of other economic horrors. On the other hand, Tsipras and his team could accept yet another round of unpopular austerity measures, further cutting salaries and pensions and raising taxes, under the hope that this austerity package (unlike the last several) would finally lead to an improvement in the Greek economy. But with unemployment already at record highs, this would put severe financial strain on Greek families, and potentially cause the economy to collapse further.

In other words, it didn’t matter which decision the Greeks made; the ramifications were going to be pretty bad. It was pick-your-poison time.

One might say that the biggest threat to Greece right now, however, wasn’t austerity, nor is it the now very real possibility of leaving the Euro. The biggest threat to Greece right now may be the political instability that could result from citizens’ frustrations regarding the inevitable fallout from either of those two unenviable paths. Disruptive protests, rioting, constitutional change, or (at worst) an unconstitutional change in government or regime would only make Greece’s economic situation worse—and could have ripple effects on every aspect of Greek life for years to come.

So how does the government in Athens prevent unrest? Bringing its citizens into the decision-making process may make them more likely to accept the ultimate outcome, whatever that outcome may be. As we discussed in our book, Democracy Despite Itself, there is a strong psychological principle that people are much more at peace with a decision—even one they disagree with—if they are given a voice in the decision-making process. This so-called “procedural justice” also reduces corruption and makes people more willing to follow rules and get along.

Research captures these effects. During the 1991 California drought, the amount of water residents rationed wasn’t influenced by their beliefs about the drought’s severity, but instead was driven by how fair they thought water pricing and allocating polices were. Studies show that people are more likely to pay taxes when they get to vote on where the tax money goes, even when they aren’t on the winning side of the vote.

The referendum result isn’t likely to help Greece make better decisions about it s future, but it very well could help Greece nonetheless. The mere fact that the voters themselves are deciding could make all the difference in the world.

Mike Edwards is a writer and political analyst based in Boston. Daniel Oppenheimer is a professor of psychology and marketing at the UCLA Anderson School of Management. They are the co-authors of Democracy Despite Itself: Why a System that Shouldn’t Work at All Works so Well. They wrote this for Zocalo Public Square.

TIME Money

Banks Are Right To Be Afraid of the FinTech Boom

FinTech offers users an array of financial services that were once almost exclusively the business of banks

Americans across the economic spectrum struggle to manage their money. We spend too much, save too little, and wait too long to invest. While we could all be more responsible, access to services that facilitate sound financial decision-making is often concentrated at the top of the economic ladder. Each rung down, those resources get a little harder to come by, with those at the very bottom are often locked out of the financial mainstream. Poor and minority families historically have gotten caught between the rock of discriminatory practices like redlining and high-risk lending and the hard place of debt traps. Without access to banks, they find themselves subjected to the to the exorbitant fees and charges by providers of alternative financial services, such as check cashers and payday lenders.

Policymakers should take steps to ensure that all Americans have access to secure, functional, and affordable financial services, as these commodities are crucial to financial wellbeing. But in absence of policy action, the market has moved to fill the need. Financial technology companies (known collectively as FinTech) are broadening access to a range of services that they claim can help us manage our spending, save more money, and make investments in our long-term financial security.

FinTech offers users an array of financial services—from transactions to underwriting—that were once almost exclusively the business of banks. Personal finance apps like Acorns, Digit, and Mint help users track their spending and stay on budget without the assistance of a financial advisor. Personal lending innovators like Lending Club and Prosper enable users to bypass traditional intermediaries with a peer-to-peer lending platform. Companies like Betterment and Wealthfront that facilitate investments, financial planning, and portfolio management have emerged as popular alternatives to traditional wealth managers.

Investors have responded favorably to FinTech companies. Just six months into 2015, FinTech startups have raised nearly $12.4 billion from venture investments and are on track to double their backing over the previous year. While FinTech is booming, it’s unlikely to replace banks altogether, and many FinTech companies actually rely on existing bank accounts. But it is sapping away the banking sector’s profitability, which has raised concerns among traditional banks about their capacity to maintain low-margin services and in a rapidly changing marketplace.

Generally, banks follow a loss leader pricing strategy: They provide certain products (checking accounts) at a cost below their market value to stimulate the sales of more profitable products (loans) and to attract new customers. Now FinTech companies are extracting the most profitable portions of the banking model, leaving banks stuck with high overhead and less profitable products. To recoup their resulting market losses and mitigate the threat of FinTech insurgents, traditional banks and other legacy players in the financial sector are discussing a range of strategies, including charging more for low-margin services, closing bank branches to cut costs, and acquiring FinTech companies. Unfortunately, the impact of some of these strategies has the potential to disrupt the financial lives of low-income households.

The worst-case scenario for low-income families is FinTech’s drain on their profitability prompts banks to abandon their loss leader strategies. For people at the margins of the financial mainstream, the loss leader strategy is a financial lifeline that enables them to maintain checking and savings accounts. If banks compensate for lost revenue by raising fees and charges on current accounts, account ownership is likely to decline. Currently, over a quarter of American households are un- or underbanked. According to the Federal Deposit Insurance Corporation, one in three unbanked households reported high or unpredictable account fees as a reason for not owning an account and approximately 13 percent reported this to be the main reason. Raising the cost of owning a bank account could drive even more people away from the banking system entirely.

While life with banks can be rough, life without banks can be brutal. Without access to a transaction account, households often turn to alternative financial products that charge exorbitant fees. The average underbanked household spends a staggering $2,412 each year on interest and fees alone. For many households, access comes down to proximity to a brick-and-mortar branch. But as banks look to slash costs, branches are closing in droves (nearly 2,599 in 2014). Low-income and minority neighborhoods are often the first areas targeted. Since late 2008, an astounding 93 percent of the bank branch closings have been in ZIP Codes with below-national median household income levels. And the rise of digital banking may contribute further to this trend as regulators consider a new proposal that would give banks more latitude to decide where they have physical branches.

If the threat to their business grows, banks could opt to use their superior resources to buy up FinTech companies. With the five biggest banks controlling nearly $15 trillion in assets, FinTech’s $12.4 billion in venture investments this year look like peanuts. Acquisition was the approach Capital One took earlier this year when it bought Level Money, an app that helps users track their spending. If proven profitable, it’s likely that other banks will start buying up the competition. While usurping the threat of FinTech by co-opting it may relieve immediate pressure on the banks, it won’t necessarily stop them from trying to cut costs in other ways that disproportionately impact those at the bottom rung on the income ladder. With the last 50 years of history at our backs (or even just the last 10), do we really want banks annexing every potential rival?

Competition is good, as is innovation, especially if they create inroads for new and currently underserved consumers to access and use traditional financial services. And for all their insurgent disruption, some FinTech startups have vision that traditional banks have lacked. They see underserved consumers as an emerging market, especially in developing countries where technological advances like mobile banking have been a key driver of financial inclusion.

The rise of FinTech gives policymakers a good opportunity to take stock of where we have been and where we should be going when it comes to providing the means for low and medium-income Americans to save for the future. As these market forces unfold, policymakers should be designing and supporting ideas that promote more financial inclusion, whether that means more community credit unions, subsidies and tax credits for financial services, or a government-run option like postal banking. Regardless of the provider, legislators need to make access to secure, functional, and affordable financial services for all Americans a bigger priority—and FinTech’s impact on the banking industry is bringing that need into sharper relief by the day.

Patricia Hart is a program associate with the Asset Building Program at New America. This piece was originally published in New America’s digital magazine, The Weekly Wonk. Sign up to get it delivered to your inbox each Thursday here, and follow @New America on Twitter.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME stocks

Why China’s Stock Market Meltdown Could Hurt Us All

The negative consequences are already spreading beyond China's borders

The great Chinese stock bubble of 2015 has, as many expected it would, popped. After peaking on June 12, the Shanghai Composite Index has fallen 32% and the more volatile, tech-oriented Shenzhen Composite Index has dropped 40%.

For the first three weeks after those markets peaked, Chinese stocks listed in the relatively stable US exchanges were largely unaffected. Many of them declined a bit, but for the most part investors accepted they were insulated from the margin trading, absurd valuations and speculative trading afflicting stocks in Shanghai and Shenzhen.

That has changed quickly this week. NetEase, a Chinese gaming company traded in New York, has lost 10% of its value in the past two days. Sina has fallen 15% while its peers in the online-media industry have slipped further: Yoku down 19%, Sohu and Weibo both down 20%, Changyou, another gaming company, is down 25%.

There are a couple of exceptions. E-commerce titan Alibaba is down 3% in the past two days, while Internet giant Baidu is down 5%. Both of those stocks are widely held and considered the blue chips of Chinese companies traded on US exchanges.

Few of these stocks saw the huge surges in share prices over the past year that their cousins on Chinese exchanges did, in which many recent tech IPOs tripled or more in value thanks to speculation and margin debt. Loans to individual investors may have risen as high as $1 trillion earlier this month. NYSE margin debt, by contrast, is around $500 billion.

When stock prices collapse, they prompt margin calls that require investors to either put up more money against the loans or sell the stocks, which only accelerates the selloff. But if investors in the US aren’t getting margin calls, why are the shares of Chinese companies traded on the NYSE and Nasdaq suddenly diving?

There are two key reasons. The first is that the declines on the Chinese exchanges have gone from a simple correction to a full-fledged selloff and now seems to be on the verge of something much more perilous: an all-out market panic.

That scenario seems likelier after the Shenzhen Composite fell another 2.5% Wednesday and the Shanghai Composite fell 5.9%. But those figures don’t tell the full story, because more than 1,300 companies have halted trading in their shares to prevent declines – including 32% of listings in Shanghai and 55% in Shenzhen. In total, 40% of the market cap on those exchanges can’t be bought or sold right now.

The second thing that changed this week is that it became apparent that the Chinese government, with its formidable ability to control many aspects of its economy, has met its match in the stock market. China recently cut interest rates, prevented any new IPOs and arranged $19 billion in purchases from fund managers, moves that only slowed the selloff temporarily.

On Wednesday, China’s central bank vowed to provide liquidity to help a state-backed margin finance company try to stabilize the market, once again to no immediate benefit. China’s efforts to stem the panic selling may end up like the Japanese government’s campaign to shore up stocks in Tokyo when that market collapsed in the early 1990s. Then, government money was spent only to slow an inevitable decline, as well as its recovery.

For Chinese companies, this is bad news because it threatens to stall consumer spending. As China’s growth has slowed, the government has tried to shift the economy away from a reliance on infrastructure and housing toward consumer spending. Many of China’s Internet companies listed in the US rely heavily on consumer engagement with e-commerce, games and ad-supported content.

The decline in US-traded stocks coincides with the spread of the selloff from mainland stock exchanges to the Hong Kong market. The Hang Seng Index fell 5.8% Wednesday and is now down 10% for the week. Tech stalwarts traded there are falling even further: Internet-media giant Tencent is down 14% this week and computer-manufacturer Lenovo is down 12%.

There is a broader concern here: The emergence of a stock bubble on Shenzhen and Shanghai exchanges occurred inside China’s borders. The popping of the bubble did too – until this week. It’s not just Hong Kong stocks and shares of Chinese companies traded in the US, the selloff is spreading for now to markets in countries that do a lot of business with China. Japan’s Nikkei 225, for example, was down 3.1%, dropping below 20,000 for the first time in nearly a month.

If the selloff in China does turn into a panic-driven meltdown, it could be bad news for US companies that have come to rely on the growing Chinese market for sales. GM said Tuesday its China auto sales were flat in June, even after it slashed prices 20% on dozens of models. Apple’s fortunes have revived recently on the success of its iPhones in China. The effect of the selloff on those sales last month may become apparent when the company reports earnings later this month.

Until now, the rise and fall of the Chinese stock bubble this year has been a fascinating spectacle to many in the US. And it remain that if the government does shore up the market or if the sense of panic dissipates. If not, the turmoil could end up slowing down China’s economy even further, and that could also become a drag for many US companies in this globally interconnected era.

TIME Economy

These 5 Facts Explain Greece’s Bank Shutdown

greece bank shutdown referendum
Simon Dawson—Bloomberg/Getty Images Pedestrians pass the headquarters of the Bank of Greece SA, Greece's central bank, in Athens on June 28, 2015.

Capital controls may have stopped Greek banks from bleeding out, but how long can they stave off the panic?

As the people of Greece are learning, without functioning banks, the daily lives of citizens and businesses come screeching to a halt. Capital controls—limitations on the free movement of money—are seen as desperation measures, and whether they work depends on how well the medicine suits the disease. If currencies or banks themselves are harming an economy, capital controls may work; otherwise, watch out. These five stats explain some of the most recent implementations of capital controls and how Greece compares.

Iceland

When the global financial crisis hit in 2008, Iceland’s banks were caught with assets valued at over $185 billion, roughly 14 times the size of the country’s annual output, giving a whole new meaning to the phrase “too big to fail.” Fearing exposure to the overleveraged banking sector, investors started fleeing the krona. Iceland’s currency lost over 50 percent of its value against the euro in just months. Assessing the situation, the government in Reykjavik decided stopping the flow of money out of the banks was the only way to prevent a bad situation from turning into utter catastrophe. Iceland’s GDP fell by 10 percent from 2009 through 2010. But the exchange rate stabilized shortly after capital controls were introduced, and Reykjavik eased its monetary policy, making borrowing cheaper. For the past three years, Iceland has been growing at about a 2 percent rate per year.

(NYT, Economist, Vox EU, Economist)

Malaysia

After years of growth, the economies in East Asia started to sour in 1997 when Thailand was forced to unpeg its currency from the U.S. dollar. The crisis spread to neighboring countries, and global investors started selling Malaysian assets to bet on the depreciation of the currency, the ringgit. By mid-1998, the ringgit’s value had fallen 40 percent, the stock market’s value had plummeted 75 percent, and Malaysia imposed capital controls that September. The government had tried raising interest rates to keep money from fleeing the country, but the move hurt businesses and the economy, which contracted by 7.4 percent in 1998. Capital controls allowed the Malaysian government to spend money on public works projects without injecting too much liquidity into the Malaysian money supply. By 1999, Malaysia was growing again at 6.1 percent.

(IMF, Economist, World Bank)

Cyprus

At its height, Cyprus’s banking sector was 7.5 times the country’s annual GDP of roughly $23 billion, largely fueled by Russian investors using Cypriot banks as tax havens. But Cypriot banks also held a significant amount of Greek government debt. In 2011, Cyprus’s banks were required to accept a 50 percent write-down on that debt. With its banks severely weakened, Nicosia was forced to request its own bailout from Europe in March 2013, to the tune of 10 billion euros. But harsh conditions were attached: first, Laiki Bank—at the time the island’s second largest financial institution—would be shut down and its “good” assets would be merged with the Bank of Cyprus. Following that, all deposits in the Bank of Cyprus above 100,000 euros would be subject to a 47.5 percent haircut, with depositors receiving bank shares in exchange for their lost cash. In this case, capital controls were imposed to give Cypriot authorities time to restructure the banking sector. Nearly two years later, those controls have finally been lifted and Cyprus’ economy has started to recover.

(Reuters, NYT, FT, Economist)

Argentina

Like Greece, Argentina had a long history of government overspending and weak institutions. Despite growing for most of the 1990s, by 1999 the Argentine economy was mired in recession and saddled with 14.5 percent unemployment and unsustainable government debt. But unlike Greece, Argentina had its own currency, the peso, which was pegged at an exchange rate of one peso to one U.S. dollar. In December 2001, Buenos Aires imposed capital controls while it forced a conversion of its banks’ dollar deposits into pesos, but at a new exchange rate of 1.4 pesos to the dollar (the adoption of a floating exchange rate ultimately dragged the peso’s value down almost 90 percent overall). The government limited withdrawals to 250 pesos a week in a move known as El Corralito, or “the little fence.” Even with these draconian measures, Argentina defaulted in 2002 on more than $81 billion owed to external creditors, though notably it paid its debt to the International Monetary Fund. The immediate aftermath was miserable: unemployment went north of 20 percent, with over 50 percent of the population living in poverty. But Argentina started to recover by June 2002 as domestic growth was boosted by its newly devalued peso and its traditionally strong agriculture sector. Argentina has been limping on since.

(NYT, NYT, Telegraph, Economist, BBC)

Greece

And now, Greece. Last week, Athens decided to shutter banks in a defensive move to prevent a bank run as the government’s negotiations with its creditors collapsed. Upward of $45 billion has been pulled out of Greek banks since mid-December over fear that deposits would be seized and forcibly converted from the euro to a new drachma. If this conversion were to happen, things would get much worse for the Hellenic Republic—Standard & Poor’s recently estimated that Greece could lose 20 percent of its GDP over the next four years if it were to leave the euro, on top of the 25 percent it has already lost since the crisis started. Unlike Argentina, Greece doesn’t have a strong export industry that can benefit from the competitiveness of a devalued currency, meaning unemployment would climb even higher than the current rate of roughly 26 percent. What’s worse is that even if Greece went the way of the drachma, it would still have a mountain of debt that’s denominated in euros—Greece needs to make payments worth another 10.33 billion euros to the European Central Bank and the IMF in July and August alone. And that’s not including the IMF payment of 1.5 billion euros it just missed last week. So while capital controls may have stopped Greek banks from bleeding out, the Greek economy overall is still critically wounded.

(CNBC, Fortune, Guardian, BBC)

TIME Greece

Here’s What Could Happen Next in Greece

No one cares enough to save Greece with their own money

Confused? You should be.

All sides say they still want Greece to stay in the euro, and as long as that’s the case, then there’s always a chance that they will make the necessary compromises.

However, all sides are acting like they would rather Greece were out of it: Greece’s government has made impossible promises about keeping the euro without austerity. The Eurozone’s last offer was a deal that pretended Greece has a realistic future in the currency union without growth. The European Central Bank is pretending that Greece’s banks are solvent, but still refusing to lend them any more money to cover a massive run by depositors.

So where do things go from here?

1. How long can the current deadlock last?

The best guess is still July 20th. This is the day when Greece is due to repay the ECB €3.5 billion. It will miss that payment barring some kind of miracle. On that day, it becomes politically impossible for the ECB to continue making emergency short-term loans to Greek banks. If the ECB won’t take the Greek government bonds as collateral, their value will collapse, and the banks will become insolvent (for supervisory purposes, their current troubles are deemed to be ‘temporary’ liquidity difficulties).

No sensible investor would put new money into a bank in that situation, so you would have to use administrative measures to reduce the banks’ liabilities to a level where they are properly covered by assets. The only realistic ways to do that are to convert deposits into equity, or to “haircut” them. That can either be done by simply writing them down or by redenominating them in a new currency.

2. Is there no hope that the creditors will back off on the demand for austerity?

Actually, yes, there is. The creditors’ red line is to write off part of the money Greece owes them. But they can achieve the same effect by rescheduling the debt so that it’s paid off over a much longer time (say 50 years) and with a long grace period. That way, Athens wouldn’t have to run as tight a budget as is currently being demanded, giving the economy more room to grow. If the economy is growing and the debt level isn’t, then pretty much everybody would be satisfied with that.

But there are a lot of problems even with that. For one thing, Greece is already paying less, proportionately, on debt servicing than countries such as Italy and Belgium (whose coat-tails they would be riding on). For another, it would encourage radicals in other countries, bolstering the kind of tax-and-spend leftism that is anathema to Berlin and the European Commission. And most importantly, growth depends on more than writing debt off. The IMF, which suggested the above idea on debt re-profiling last week, despairs of the Greek government ever reforming enough to generate growth.

3. Will Germany relent?

German press coverage has started to swing against Chancellor Angela Merkel as the risk of breaking up the Eurozone rises (see above), but it’s happening too late to change a groundswell of public opinion bitterly opposed to lending Greece any more money. Merkel herself said that there are “only a few days left” to avoid the worst as she arrived for today’s summit. In that timeframe, she has more to lose politically by caving in to Greece than by refusing them. The most likely outcome is that she will try to spin a “Grexit” as a measure to strengthen the euro’s credibility. The Eurozone’s political elite would dearly like to believe that, but the evil Anglo-Saxon speculators who dominate global finance will take more convincing.

4. Can anyone else stop Greece being forced out?

It’s clear that governments from China to the U.S. are concerned by what could happen if Greece goes (President Barack Obama has called Merkel and France’s President Hollande in recent days to voice those concerns). There will be major market volatility (and China’s are quite volatile enough already), huge question marks over the future direction of the E.U., another slowdown in its economy (the world’s largest), and a failed state right on the front line of a migrant crisis that is a major humanitarian disaster.

Despite all this, no-one (not even Vladimir Putin or Nobel Prize-winning liberal economists) seems to care enough about the Greek state, in its current dysfunctional form, to save it with their own money.

5. Would Greece be better off without the euro?

Who better to ask than the Greeks themselves? A Bloomberg poll last week showed 81% of people wanting to keep the euro, and only 12% wanting a return to the drachma. That’s because a euro is a hard currency, with real spending power. Nobody knows what the value of a currency printed at will by Greek governments would be worth, but Greeks remember the last one well enough to have very serious doubts about it. For more on what a drachma would be worth – read this by Fortune’s Stephen Gandel.

6. So why did Greeks vote ‘no’ at the referendum?

Because the government’s message–that this was about austerity–drowned out the warnings from the rest of Europe that it was actually about keeping the euro. That suggests that Greeks are still suffering from acute cognitive dissonance, believing that they can keep the euro without the conditions that everyone else in the Eurozone says are necessary.

7. Will Greece cave at the last minute?

Maybe. The government has to pay pensions and public-sector wages again at the end of every month, and it will not be able to gather together the euros to do that after July 20th. So at some stage it has to admit who has ultimate control over the supply of euros. At that point, it could accept the creditors’ demands. But so many of Tsipras’ party would rebel that the country will need new elections and a new parliament to have any hope of implementing a new deal. On the bright side, once Tsipras and Syriza are out of power, the European might be more inclined to grant debt relief. Politics is a personal business, after all.

This article originally appeared on Fortune.com

TIME Money

Could You Live on $64 a Day If Greece’s Crisis Happened Here?

Imagine if Greece's capital controls were imposed in America

Greece’s banks remained closed on Monday for the sixth straight working day, heightening anxieties over the nation’s cash withdrawal and transfer limit of €60 ($67) per day per account.

What if those same capital controls were imposed in America? As shown in the chart above, our budgets would need a significant downsizing — by over 50%.

It’s true that credit or debit card transactions — for some, the primary mode of payment — aren’t affected by the rules. But many day-to-day Greek businesses and services, like restaurants, have begun demanding cash payments. Other Greeks have found even their credit cards are being rejected with confusion surrounding the capital controls. As a result, for many account holders, it’s truly a $67 per day limit: $67 for food, housing, healthcare and transportation, often to support a family of several people (We should note that some Greek public transportation has been free during the capital control period).

According to the U.S. Bureau of Labor Statistics’ most recent report on U.S. consumer expenditures, American households spent an average of $140 per day in 2013. Indeed some of these costs could be eliminated more easily, like leisure ($6.80) and cash contributions ($5.02). But Americans’ three highest daily costs — housing ($49.98 per day), transport ($24.67) and food ($18.09) — aren’t just harder to cut down on, but also far above the $67 limit already.

Read next: Why Greece Matters for Everyone

TIME Economy

Why Greece Matters for Everyone

Like it or not, Greece is a domino that will have ripple effects throughout the rest of the world

Greece is a tiny country. It’s 0.3 % of the GDP of the world. Most private creditors took their money out of the debt-ridden nation years ago. So why is the possible exit of Greece from the Eurozone rocking markets? Because it represents what could be the end of the biggest, most benevolent experiment in globalization, ever.

On Sunday, Greek voters said “no” to Europe’s latest bailout offer. That means that a Greek exit from the Eurozone is now very likely–most analysts are putting the odds at somewhere around 60%-70% at this point. For Greeks, the next few weeks will be chaotic. Banks are closed; last week, people could take only 60 euros at a time out of ATM machines, this week it may go to as little as 20 euros. Merchants have begun eschewing credit cards in favor of hard currency as a cash hoarding mindset kicks in.

Global markets are not surprisingly down on the news and will likely be quite jittery for the next few weeks. It’s not that the economy of Greece itself matters so much–China creates a new Greece every six weeks–it’s that a Greek exit from the Eurozone calls into question the entire European experiment. Europe was always an exercise in faith: 19 countries coming together to form a made-up currency without any common fiscal policy or true political integration seemed like a great idea in good times, but was destined to be fragile in bad times.

MORE: Here’s What Greek Austerity Would Look Like in America

The risk now is that a chaotic Greek exit from the Eurozone starts to undermine faith in other peripheral countries, like Italy or Spain. Watch what their bond spreads do over the next few days. If they rise a lot, it means investors are worried. While ECB head Mario Draghi has promised money dumps to help stabilize these nations and any other Eurozone countries that need help (perhaps we should start calling him “Helicoper” Mario), he can’t stop the euro from falling against the dollar, or keep investors from fleeing to “safe havens” like US T-bills. That might be good for US bond markets, but Europe’s crisis could also impact the Fed’s ability to raise interest rates in September, which until quite recently seemed like a sure thing.

No wonder President Obama and Jack Lew are getting vocal about it all–while this isn’t going to be a Lehman Brother’s style domino collapse of financial institutions (private creditors represent only about 12 % of Greek debt; most got their money out back in 2011 or 2012), there’s little question that Europe’s growth will slow, which will affect US companies and workers. The stronger dollar will also hurt US exporters.

But even more important than the short-term jitters are the longer-term economic and geopolitical impacts of the Eurozone crisis. One of the reasons that Russia has been so aggressive in places like the Ukraine is that Europe is perceived as being weak, unable to make the political integrations that would actually solve this debt crisis permanently. (That would require creating a real United States of Europe–something that requires German buy in.)

MORE: Greece Says ‘No’ to Austerity

The Greeks may think that a “no” vote to Europe has increased their power to bargain for a third bailout, but I think it will be very hard to convince German voters of that (and any deal will have to pass through the Bundestag). Germans simply don’t understand why the rest of Europe can’t be more like them, despite the fact that the math doesn’t really work.

If Greece is left on its own, where will it turn for support? To Russia, China, and any number of countries in the Middle East. Suddenly, you’ve got the stability of the Balkans in play. And as it becomes clear that the future of the world’s second largest reserve currency isn’t necessary a given, that could weaken investment in Europe as a whole, throw the Eurozone back into recession, and undermine the EU on the world stage. A political bloc that can’t guarantee its own currency will also have reduced clout in any kind of political negotiation. Europe’s weakness could be very destabilizing at a time when America’s own geopolitical power has ebbed.

That’s bad news for everyone. Europe is one of the three legs of the global economic stool, along with the U.S. and China, which is in the middle of its own debt crisis. America’s recovery isn’t strong enough to pull the world along. Europe’s debt crisis is not only an economic crisis but also a political crisis–one that poses challenges not just the EU itself, but liberal democracy as the model of the future.

MORE: Greek Finance Minister Resigns

TIME Greece

Everything to Know About Greece’s Debt Vote

It could have serious consequences for Europe's future

Q. Why and when are the Greeks voting on this referendum?

A. The Greek government called the referendum because it failed to get acceptable terms for debt relief and further assistance in four months of negotiations with the creditors. It felt it couldn’t agree to the last set of proposals received before the expiry of its bailout, because they couldn’t square it with their election promise to end austerity.

The referendum will be on Sunday, 5th July.

Q. So what are the Greeks actually being asked to vote on?

A. They’re being asked to vote on a set of proposals drafted by IMF, ECB and European Commission officials that were never formally completed or published.

This is the actual ballot. As you can see, the “No” (OXI) option, recommended by the government, is above the “Yes” (NAI) option.

Screen Shot 2015-07-02 at 16.14.12

For the non-Greek readers, (or for those who only know ancient Greek), here’s a translation:

Screen Shot 2015-07-02 at 16.18.50

The two documents referred to can be found here and here (debt sustainability analysis).

Q. What are the key points?

A. The most contentious demand is that Greece squeeze another 1% of GDP in savings out of its battered pension system, specifically by eliminating top-ups that have been desperately needed by poorer pensioners to keep themselves above the breadline in recent years. The other big point is the elimination of VAT exemptions for Greece’s islands. The government argues this threatens the existence of the tourism industry on the islands.

The DSA, meanwhile, almost–but not quite–brings itself to admit that the debt load is unsustainable. If Greece adopts and implements the conditions immediately, it says, then the debt-to-GDP ratio could fall to 124% by 2022 from over 175% right now. That’s the best case scenario, and not one that sits comfortably with the last five years’ experience. It’s also not many people’s idea of sustainability.

Q. What happens if Greece votes ‘Yes’?

A. A ‘Yes’ vote would be the first step towards a third bailout agreement for Greece (the IMF suggested today that Greece will need €50 billion, or $56 billion, in financing to get it through to the end of 2018, as well as a 20-year grace period). The last one expired Tuesday.

Q. Could the Greek government collapse?

A. Probably. It has campaigned for a ‘No’ vote, so the blow to its credibility would be huge. Its electoral mandate–to end austerity while keeping the euro–would be obsolete. Individual ministers have already said they’ll resign in that event. However, the radical left-wing Syriza party is by far the largest in parliament, a large part of its lawmakers won’t sign any new bailout deal, and there is no stable pro-bailout majority without it. That points to new elections. Quite how negotiations could resume, and quite how the banks could reopen, in those circumstances isn’t clear.

Q. If Greece votes ‘No’, what happens?

A. Prime Minister Alexis Tsipras claims that a ‘No’ vote will strengthen the Greeks’ negotiating position by showing the strength of resistance to further austerity. However, the creditors have shown no sign that it would change their position. More likely is that the continued uncertainty will make it impossible for the banks, which have been closed since Monday, to reopen. They would be immediately faced with demands for cash that they can’t possibly meet. In practical terms, the banks couldn’t open again until the bulk of their liabilities–i.e. customer deposits–had been re-denominated in a new Greek currency. This would lead to a large part of the country’s savings being wiped out.

Q. Could this vote result in Greece leaving the Eurozone?

A. Absolutely, because it would be clear that the political will to share a currency with Germany and others was no longer there. How we get from A. to B. is unclear, because there are no precedents and no provisions for it in the E.U.’s treaty. There is a provision for leaving the E.U., but not even Tsipras wants to do that.

Q. Is the bailout deal they’re voting on even still on the table?

A. Not officially, but the creditors will look stupid, merciless and irresponsible if they don’t react to a ‘Yes’ vote with something to relieve the immediate pressure on Greece’s banks and the economy at large, and a large part of the political dynamic in this process is about dodging blame for the whole mess. It’s tempting to think that, once Syriza is out of government, some form of debt restructuring will become politically possible. The creditors would rather eat dirt than reward a party, and individual ministers, that they regard as dangerous charlatans.

Q. What does this mean for the global economy?

A. A ‘Yes’ vote would remove one of the big geopolitical risks that are currently holding back investment in the Eurozone, which would be a clear bonus to global growth (the Eurozone is over two-thirds of the E.U. economy, which about 20% of world GDP).

A ‘No’ vote, could have quite mild consequences if Greece can be kept inside the Eurozone and the ECB douses the flames of market fear with a flood of liquidity. That wouldn’t be as good for the economy, but it would at least contain the damage to financial markets. But a ‘No’ vote that leads to “Grexit” is another matter. Again, one would expect the ECB to throw money at the markets to keep volatility down, but the sight of European integration going into reverse would nix a basic geopolitical assumption of the last 60 years. The resulting political uncertainty could be highly damaging for investment not only in Europe, but also further afield.

 

MONEY Jobs

U.S. Job Growth Slowed in June

The share of working-age Americans who are employed or at least looking for a job sank to the lowest rate since October 1977.

U.S. job growth slowed in June and Americans left the labor force in droves, according to a government report on Thursday that could tamper expectations for a September interest rate hike from the Federal Reserve.

Nonfarm payrolls increased 223,000 last month, the Labor Department said. Adding to the report’s soft note, April and May data was revised to show 60,000 fewer jobs were added than previously reported.

With 432,000 people dropping out of the labor force, the unemployment rate fell two-tenths of a percentage point to 5.3%, the lowest since April 2008.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell to 62.6%, the weakest since October 1977. The participation rate had touched a four month high of 62.9% in May.

In addition, average hourly earnings were unchanged, taking the year-on-year increase to a tepid 2.0%.

TIME Economy

U.S. Unemployment Rate Drops to 5.3%

Employers Post Most Job Openings In Four Years In June
Spencer Platt—Getty Images A "now hiring" sign is viewed in the window of a fast food restaurant on August 7, 2012 in New York City.

But labor force participation dropped

The United States labor market put in a tepid performance in June, with the addition of only 223,000 jobs, according to a report released by the Bureau of Labor Statistics on Thursday.

That was short of analysts’ exceptions, which put estimates for June job growth in the 225,000 to 230,000 territory.

According to the household survey, unemployment declined to a seven-year low of 5.3% in June, after inching up to 5.5% in May.

Though the jobs report’s top line numbers were not too bad, a closely-watched sub-indicator didn’t show such good news: hourly wages remained flat in June. That stagnation could delay a long-awaited hike in interest rates. After the May jobs report showed that wages had increased by 8 cents per hour, Federal Reserve chair Janet Yellen said at a press conference June 17 that “wage increases are still running at a low level, but there have been some tentative signs that wage growth is picking up.”

Thursday’s report—released a day early because of the observation of the July 4th holiday on Friday—also showed that labor force participation dipped by 432,000 or 0.3% in June after an increase of similar size in May. The share of Americans participating in the labor market fell back from 62.9% in May to 62.6%–its lowest since 1977.

The number of long-term unemployed who’ve been without a job for 27 weeks or more declined by 381,000 to 2.1 million in June. Over the past 12 months that figure—which currently makes up 25.8% of the unemployed—has decreased by nearly 1 million.

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