D-day for Greece and the European Union

The Greek referendum on whether to approve reforms and fiscal measures proposed by the International Monetary Fund, European Commission and European Central Bank represents a monumental gamble by the government as the country faces its most critical moment since at least 1974, when democracy returned to replace military rule.

Austrian Finance Minister Hans Jörg Schelling has asserted that a Greek exit from the currency is "almost inevitable".

Given the sharp deterioration in relations between Greece and its creditors, as well as some of its EU partners, the country may be at a fundamental crossroads. Indeed, some in Brussels believe Sunday's referendum is not just about the future of the Greek economy, but also the country's continued membership in the EU, which it joined in 1981.

In calling the referendum, the Greek government has, in effect, given its people the key decision on the country's immediate economic future. While this contains some advantages for the leading Syriza party, it also has multiple political and economic risks. Syriza wants the people to vote "no" on the reforms, and if they don't, the government could be fatally undermined.

But if the voters do say no, the issue becomes whether the government has a clear and comprehensive plan for what would come next. And with no new source of international credit, the administration appears unlikely to be able to make a repayment to the European Central Bank on July 20.

In this scenario, Greece would need to adopt new ways to pay salaries and pensions. And it is reported Athens has already made plans to potentially nationalise the banking sector and introduce a parallel currency to pay its bills.

The prospects for a rupturing of the euro zone, with the possible economic earthquake this could bring, appear to be growing by the day. However, some market participants appear more sanguine than a few years ago. In part, this is because today, more than 80 per cent of Greece's public debt is owned by institutional investors, so turmoil in Athens may not spread significant contagion through the euro zone.

Even so, a Grexit would still be highly unpredictable. Some note the potential parallels with 2008, when it was widely assumed the international financial system could handle the collapse of a single major bank (Lehman Brothers). Also, if euro-zone membership is shown to be reversible, it could change investor perceptions of risk.

This is Greece's biggest decision for at least a generation.

Andrew Hammond, a former special adviser to the British government, is an associate at IDEAS at the London School of Economics