ANALYSIS:Papandreou's decision is dangerous and only undermines faltering European confidence
AS THE euro zone lurches from one bout of woe to the next, George Papandreou’s decision to call a referendum on the second Greek bailout makes a dangerous situation much worse.
Papandreou’s gambit is the desperate act of a desperate prime minister clinging to power by his fingernails. It is anyone’s guess if this manoeuvre leads Greece out of the single currency altogether, with all of the uncertainty that would cast over other frail countries such as Ireland.
Whatever the ultimate outcome of the vote, it has thrown Europe’s agonising campaign against the debt crisis into chaos. A G20 summit, beginning tomorrow in Cannes, was supposed to mark the denouement of a months-long effort to regain the initiative. It may be little more than a fire fight as global leaders try to figure out what to do next. There are no easy answers.
Only a few days have passed since EU leaders reached a difficult deal to calm the turmoil. The edifice now hangs by the fraying thread of Greek public opinion. If the battle against the crisis is a mega-sized confidence game, the news from Athens serves to undermine that confidence. Months of uncertainty loom.
No one in Brussels is saying anything officially, of course. Protocol requires that the European institutions do not overtly criticise the vicissitudes of democracy in member states.
But there is no hiding Europe’s exasperation with the Greek prime minister. He is faulted for poor timing, poor communications, his lack of warning and for unilaterally marching down a path which drastically raises the stakes for everyone.
Most observers agree he does not do this lightly. Indeed, the move stands as a vivid illustration of Papandreou’s acute weakness. But at what price his political survival? He is besieged within his own government, which is on the point of collapse as nay-saying MPs take fright at mounting public anger with its austerity policies. The EU deal struck in the pre-dawn hours last Thursday appears to have been the tipping point.
The alternative for Papandreou would have been to call an election, which he would be bound to lose. By calling a referendum, he makes a final bid for survival by giving Greeks a choice between salvation at the price of an onerous bailout or some kind of national demise without a rescue plan.
The ballot papers won’t present a choice between bailout and uncontrolled default, but the politicians certainly will. This is deeply risky; far too risky for most of Papandreou’s European partners.
For one thing, the démarche threatens ongoing talks with global banks on a deal where they are expected to take a 50 per cent loss on their investment in Greek sovereign bonds. While the banks have declared that the talks on this “managed default” will go on, the referendum throws the endeavour into question.
This is significant not only for Greece, which needs new bailout loans early next year, but for the wider euro zone also. The agreement was designed to convince sceptical markets that Europe had at last got to grips with the scale of the challenge posed by the debt crisis. Papandreou’s proposed referendum has had the opposite effect. As Italy struggles in the ravenous maw of the crisis, the disruption wrought on markets since he declared the vote shows just how brittle the situation is.
The move amplifies the sense of fragility and uncertainty, for it raises the threat that Greeks will reject the bailout. That could prove disastrous, no matter what fine words are uttered about the will of a doughty people in the face of adversity.
EU leaders are in no mood to offer Greece better rescue terms. Furthermore, the vote could be so overwhelming as to suggest any effort to negotiate a new bailout would be null and void. An election would be inevitable even if the margin of rejection is slim. Valid questions would still be raised over whether any party would seriously promise to execute a painful, conditions-based bailout.
The referendum could tip Greece, insolvent without copious international aid, into a chaotic default. It would then find it very difficult to sustain membership of the euro zone and politically impossible for its European partners to allow it to do so.
There may be a temptation to say “so be it, if the Greeks have voted for it”. There is no doubt such a course would carry grave contagion risks for other euro zone countries.
Although there is no end of concern in Dublin about the spin-off risks from the proposed “managed default”, the risk levels now are at new heights. Hold on tight.