Greek move for bailout referendum returns Europe to crisis mode

Reporting from London and Athens —  Europe’s latest plan to claw its way out of a monumental debt crisis lies in grave doubt less than a week after being cobbled together, following a shocking move to put the accord to a popular vote in Greece that threw both the government there and financial markets around the world into turmoil.

Confounded officials, analysts and investors were left struggling to divine what they saw as Greek Prime Minister George Papandreou lobbing a grenade into Europe’s attempts to keep his country afloat by calling for a referendum on the new rescue package. Dismayed French and German leaders summoned Papandreou to an emergency meeting Wednesday in Cannes, France, in advance of the Group of 20 summit there this week.

Europe’s leaders had hoped to use the gathering to tout their new agreement to boost their bailout fund and write down 50% of Greek debt held in private hands. But the plan is now in danger of emerging stillborn, increasing the prospects that Greece might undergo a chaotic default and that the debt crisis could reverberate through the big economies of Italy and Spain, possibly setting off another global recession.

Papandreou’s move comes just before Greece is due to receive $11 billion in loans from its European partners and the International Monetary Fund. The surprise announcement provoked an immediate backlash within his own Socialist party, leaving his government hanging by a thread.

It is uncertain whether he can survive a vote of confidence scheduled for Friday, much less spearhead a national referendum that would probably not be held before January, if at all. Some of the rebelling backbench lawmakers joined opposition politicians in demanding that Papandreou resign, form a national unity government or call snap elections.

But he emerged from a marathon emergency Cabinet session early Wednesday with the “full backing” of his senior ministers in carrying out the referendum, government spokesman Elias Mossialos said. A special committee will be appointed to oversee the details of the balloting.

During the meeting, Papandreou told his colleagues that he was determined to see the referendum through, because Greece’s rescue program could not be imposed “by force, but only with the consent of the Greek people,” according to prepared remarks released by his office.

He said the choice before voters was, in effect, “yes or no to Europe, yes or no to the euro.”

A recent poll showed that a majority of Greeks, reeling from the ever-harsher austerity cuts demanded by the European Union and the IMF, oppose the crisis plan hammered out in Brussels last week after intense negotiations. If they were to reject it at the ballot box, Greece would probably run out of money within days, triggering a default that could call the country’s membership in the 17-nation Eurozone into question.

At the very least, the markets seem destined for more volatility in the lead-up to a referendum. The already fading euphoria from last week’s agreement in Brussels was immediately wiped out.

There were a few voices that spoke up in Papandreou’s defense, crediting him with practicing democracy in the country that invented it, on an issue of supreme public importance. But many more, both inside and outside Greece, denounced his decision to hold the plebiscite.

Jean-Claude Juncker, the prime minister of Luxembourg and chairman of Eurozone meetings, warned that calling a referendum was “a dangerous decision” that could jeopardize Greece’s next installment of bailout loans. A leading German lawmaker described Papandreou’s decision as “irritating” and his behavior “peculiar.”

In Paris, French President Nicolas Sarkozy said Papandreou’s announcement “surprised all of Europe” and insisted that the new crisis-resolution plan represented “the only possible path to resolving the problem of the Greek debt.”

But that complex strategy relies partly on beefing up Europe’s bailout fund by attracting investment from such unlikely sources as the Chinese government. If Greece presses ahead with a nail-biting referendum, international investors may be deterred from putting money into the fund until the result is known, which could come too late for Europe to prevent a catastrophic escalation of the debt crisis.

With so much at stake, analysts were left to puzzle over the question posed by France’s Le Monde in its front-page editorial Wednesday: “What fly bit Papandreou?”

Some commentators said the Greek leader, aware of brewing discontent in his own party’s ranks against the new bailout plan and the piled-on austerity measures, decided to go on the offensive. Taking the plan directly to the people was a move to help silence his critics, both inside and outside his party, while buying time to shore up his position and to rally public support for the bailout.

“If he took it through the conventional route, the Parliament, he risked his government’s collapse and snap elections he most probably would lose,” said Greek political analyst Antonis Delatollas.

But “the plan backfired,” Delatollas said, because Papandreou misjudged the fury that his shock announcement would unleash both at home and abroad.

If so, it was a bad misstep for a man generally seen as a competent leader whose father and grandfather also served as prime minister. Born in Minnesota while his father taught there, Papandreou, 59, was educated at Amherst College in Massachusetts and speaks fluent English. He assumed the premiership two years ago, right before Greece’s appalling financial predicament hit the headlines.

Although his referendum announcement late Monday stunned even some of his closest colleagues, Papandreou has flirted with ideas of direct democracy before.

This year, he proposed holding a referendum on reforms to the Greek political system. But he had never before suggested that the austerity packages or Greece’s relationship with Europe and the euro ought to be put to a popular vote.

It remains unclear what the referendum question would actually ask. Although the austerity cuts ordered up by the EU and the IMF as the price of being bailed out are deeply resented, Greeks still support membership in the Eurozone. A carefully worded plebiscite could capitalize on that fact.

Also, public backing from a referendum would strengthen Papandreou’s hand in implementing the austerity measures and counter complaints of a “democracy deficit” in how the debt crisis has been tackled. Up to now, most of the steps to deal with the situation — which have entailed committing billions of dollars in taxpayer money — have been agreed on behind closed doors by European leaders, mostly at the instigation of Germany and France, the Eurozone’s dominant powers.

“Germany, which largely dominated the summit in Brussels and made practically all the decisions that it wanted to make, must also think about how all of this has to evolve,” Stephane Le Foll, a lawmaker from France’s Socialist Party, said in a television interview. “We can’t continually impose on others decisions that are made by two or by one [country].”

But Heather Grabbe, director of the Open Society Institute in Brussels, said that “in times of crisis, leaders have to show leadership, and the public wants them to do that. You can’t consult the people about every single decision.”

In the current crisis, “there hasn’t been a failure of democracy here. There’s been a failure of governance,” Grabbe said. “The key thing is that you’ve got to take key decisions and have transparency and participation. I think in Greece they’ve had that. Everybody knows what’s going on.”

Before trying to win over the public, Papandreou must try to hold his government together. That became much harder Tuesday after a leading lawmaker in his party, Milena Apostolaki, defected out of anger over the proposed referendum, shaving his majority in the 300-member Parliament to a razor-thin margin.

Another well-known Socialist lawmaker urged Papandreou to give way to a government of national unity, and six other senior party members called on him to step down. Opposition politicians are considering resigning en masse before Friday’s confidence vote.

Konstantinos Michalos, president of the Athens Chamber of Commerce, said the political damage from Papandreou’s move had already been done.

“Even if he does brave this storm and survives the confidence vote,” Michalos said, “international confidence in Greece has been shattered.”

henry.chu@latimes.com

Chu reported from London and special correspondent Carassava from Athens. Special correspondent Devorah Lauter in Paris also contributed to this report.