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View from Athens: Greek Prime Minister Papandreou has convinced his cabinet to back a referendum. Is it a good idea?
ATHENS, Greece — Democracy has prevailed around the Mediterranean this year, with the Arab Spring producing seismic changes for the will of the people. But in its birthplace, a new push for a little extra democracy threatens to undermine a major currency and tear through the global economy.
Late Monday, Greek Prime Minister George Papandreou sent global markets plummeting with the surprise announcement that he will put a European rescue package for his debt-ridden country in the hands of Greek voters.
The risks are historic even if the proposed referendum doesn't materialize. Opposition leaders and some members of Papandreou's ruling party have called for new elections, which would favor the center-right New Democracy party, whose leader opposes most austerity measures and the long-negotiated bailout.
Papandreou's move came a week after the deal was struck on a $180 billion bailout that includes a 50 percent write-off of Greek debt held by private investors. It included Europe bolstering its emergency fund to contain future debt scares in the 17-member union. Leaders portrayed it as a final solution, meant to establish stability, even if its shortcomings were immediately apparent to some.
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But back home, Greeks roundly criticized their socialist prime minister. In their view, the accord relinquished sovereignty to Europe. So after 18 months of backlash by Greeks to austerity measures including salary and pension cuts, tax hikes and impending layoffs, Papandreou has asked Greeks to chart their own course.
"The referendum will be a clear mandate and a clear message inside and outside Greece on our European course and our participation in the euro," he told his ministers during a meeting that stretched into Wednesday morning, according to a statement from his office.
Assuming Papandreou's government survives to see a referendum, a “no” vote would likely spiral Greece into a disorderly default with Argentina-style bank runs and a painful conversion back to the drachma.
For Europe, the future of the single currency is at stake. Italy's borrowing costs skyrocketed to record levels on Papandreou's announcement. German Chancellor Angela Merkel and French President Nicolas Sarkozy called an emergency meeting Wednesday in Cannes, with Papandreou attending, ahead of G-20 meetings.
Underscoring the global concern, the White House weighed in Tuesday, with press secretary Jay Carney saying Europe must "elaborate further and implement rapidly the decisions they made last week." The United States has voiced concern in the past that Europe has been slow to react, causing ripples globally.
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"It remains the case that the Europeans have the capacity to deal with this crisis and they need to implement the very important decisions they made last week to provide a conclusive resolution to it," he said.
Many experts, including Simon Tilford of the Centre for European Reform, said it's time for the European Central Bank to "get off the fence" and take aggressive measure on behalf of contagion-risk countries like Italy and Spain.
"It's looking increasingly likely that the euro zone will basically unravel unless the ECB backstops debt of the struggling countries," said Tilford, chief economist of the London-based think tank.
"If they don't do that, the future of the euro is really very much in doubt," he said. The bank’s new leader, Mario Draghi appears to agree. On Nov. 1, his first day in office, ECB bought large amounts of Italian debt.
In Greece, public support for Papandreou has sunk as a result of unpopular tax increases and other austerity measures. And more recently, he's begun losing support inside his own PASOK party. Four members this week urged him to form a "national salvation government."
The prime minister expelled an MP from the party for voting against a recent austerity bill. On Tuesday, he lost another vote when MP Milena Apostolaki quit the party in protest of the referendum. That leaves Papandreou with 152 votes in the 300-seat parliament.
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Papandreou cleared his first hurdle toward a referendum by winning support of his Cabinet early Wednesday. The next test is a no-confidence vote that finishes Friday.
Then there are opposition parties. Antonis Samaras, head of the New Democratic Party, likened the referendum to "blackmail" and said it risks Greece's future in the euro.
Samaras said he was prepared to do "whatever is necessary" to stop the referendum. One tactic is to ask his 80 MPs to resign, thus forcing an election. He has not commented on that, but was expected to address his party on Wednesday.
"Elections are a national necessity," he said in a statement Tuesday. "Everyone should take responsibility and do their duty."
Samaras, who attended Amherst College with Papandreou in the early 1970s, has said Greece should demand tax cuts in exchange for accepting deficit-reducing austerity measures demanded by international lenders. In May 2010, his party voted against the $150 billion bailout that is currently keeping Greece afloat.
"The opposition wants elections but what will elections change?" asked Athens-based independent economist Vagelis Agapitos. "I doubt that any party will negotiate a much better memorandum than the current government has. Beggars can't be choosers."
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But going to a referendum, he said, "is putting the country in jeopardy." One fear, he said, is Greeks will vote down the rescue package as a way to vent their frustration, rather than coldly weighing the pros and cons.
"With layoffs this year and next, across-the-board cuts to salaries and pensions, you have a lot of disappointed people," he said. "That may well tilt the balance in favor of a 'no' vote. If that happens, we may be opening Pandora's box."
A weekend poll showed that almost 60 percent of Greeks surveyed disapprove of the bailout, although past polls have shown Greeks strongly prefer to remain in the euro.
And Fitch Ratings said any new attempt to renegotiate terms of last week's deal would be futile, "in light of the prolonged and difficult negotiations between the Greek government and the 'troika' of the IMF, European Commission and ECB."
"Given the heavy debt repayment schedule in the first quarter of 2012, without continuing external financial support, a coercive and potentially disorderly sovereign default could follow," it said in a research note.
Former Greek finance minister Yiannos Papantoniou said there's no time for a referendum. He called Papandreou's move "an act of extreme irresponsibility." The Greek economy and global markets need stability now, and can't wait until January to obtain answers.
"The loss of time can be fatal to our staying in the euro zone," he said in a statement.
But even before Papandreou's surprise move, there was concern that the bailout would only prove to be a stopgap measure. Tilford, the London-based economist, called it a "time-buying exercise."
"It's not like the Greeks brought down a comprehensive and workable agreement," he said. "The euro zone policy-making elite has itself to blame for this."
The rash of austerity measures imposed by Europe — combined with rising unemployment and an economy projected to shrink by 5.5 percent this year — has proved too much, he said.
"This was coming," he said. "Greece has done an enormous amount. Despite having done a lot, the strategy toward them has been hugely punitive, colonial almost. At some point there was going to be a reaction from the Greek government."
For Greece, a default would be messy but at least would allow for a huge write-off of its debt and some hope for a return to economic growth, he added.
"The implications are really for the rest of Europe," he said.
Chris Karvouniaris, a 22-year-old bouzouki player, said he wants Greece to return to the drachma. The euro is too expensive, he said, and more bailouts only mean more years of adherence to austerity measures imposed by foreigners.
"If countries give us money, our hands are tied," he said while having a coffee at a shop in a northern Athens suburb. "If we want to do something for our people, Germany says no. Greece isn't Greece; it's Germany now."
Karvouniaris is studying to become a mechanic for ships, but like so many other Greeks he isn't optimistic.
"My generation, we have no future to do something, to get married, have a family. We have no work, no jobs."