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Greek Prime Minister George Papandreou arrives for a cabinet meeting in Athens on Tuesday. (Louisa Gouliamaki/AFP/Getty Images)
Greek Prime Minister George Papandreou arrives for a cabinet meeting in Athens on Tuesday. (Louisa Gouliamaki/AFP/Getty Images)

Papandreou's bailout strategy unnerves European leaders Add to ...

Thursday’s G20 summit in Cannes, intended to be a self-congratulatory gathering at which Europe’s leaders would hail their rescue of the euro, has turned into a panicked emergency session facing a looming collapse of governments, markets, economies and painstakingly crafted plans.

Greek Prime Minister George Papandreou has unleashed a cascade of political and economic crises that have overwhelmed the continent’s leaders and threatened the shared currency.

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In the 24 hours following his surprise decision late Monday night to hold a national referendum before agreeing to terms of the trillion-euro debt-reduction plan and bailout package, Europe has uneasily watched teetering governments in Greece and Italy, a market selloff of euro-denominated bonds, and a frenzied reaction from the continent’s leaders.

“It’s as if he set off a bomb under the whole continent,” said Janis Emmanouilidis, a Greek-German analyst with the European Policy Centre in Brussels. “Nobody expected this, and it’s not at all necessary that he would have a referendum – it has put everything in a much more precarious situation.”

In Athens, Mr. Papandreou’s move unleashed political chaos on Tuesday after it emerged that despite having met his German, British and French counterparts only the weekend before, he had not told them of the plan to hold a referendum in January. Even his Finance Minister, Evangelos Venizelos, was caught completely unaware. It was widely reported that Mr. Venizelos was hospitalized Tuesday with stomach pain.

French and German leaders held heated telephone conferences with Mr. Papandreou, and he will come to France Wednesday for a hastily arranged meeting.

On Friday, Mr. Papandreou faces a confidence vote that may well end his tumultuous rule – although there is no credible opposition party waiting in the wings, and an unmanageable coalition could result. Two members of his Pan-Hellenic Socialist Party quit on Tuesday, reducing his majority to one seat. Senior cabinet officials demanded that he organize a cross-party unity government.

Speaking to his cabinet late Tuesday, Mr. Papandreou told them a referendum was the only choice. “This is our democratic tradition and we demand that it is also respected abroad. And I believe it will be respected,” Mr. Papandreou said. A marathon meeting concluded early Wednesday with his cabinet unanimously backing the referendum which is to be held “as soon as possible.”

Few would disagree with the idea of asking for public approval of the mammoth bailout package – which would force bondholders to cut their holdings in half and impose a strict repayment plan, which would further hurt economic opportunities for voters who have already faced two years of harsh austerity.

The problem is that the rescue needs to be imposed within days, not weeks, and a delay would create a far worse situation than the one Greek voters might reject. Greece is within weeks of running out of cash entirely, and a default would lead to a collapse of Greek banks and far worse austerity than any bailout would impose.

Uncertain euro zone markets plummeted Tuesday, with German, British, Greek and Italian exchanges losing between 5 and 7 per cent of their value within hours and bond yields in countries such as Italy reaching new highs. They recovered somewhat on reports that the referendum bill might not obtain the majority vote needed in the Greek parliament.

But the larger damage spread beyond Greece, as panicked European leaders tried to come up with a way to prevent a worldwide run on the euro while buying time for Greece to express its approval – if that actually occurs.

A bewildered looking George Osborne, Britain’s Chancellor of the Exchequer, stood up in Parliament to announce that he’d had no idea of Mr. Papandreou’s plan, even though he’d spoken to the Greek leader the previous day.

“There is no doubt that the decision of the Greek Prime Minister has created uncertainty and instability in the euro zone,” he said, “and what we are trying to do is create stability and certainty in the euro zone.”

Nicolas Sarkozy, the French President, warned that Mr. Papandreou’s attempt at a vote could undermine the very principles he is claiming to uphold. “Giving the people a say is always legitimate, but the solidarity of all countries of the euro zone cannot work unless each one consents to the necessary efforts,” he said.

“To me,” World Bank president Robert Zoellick told reporters, “it looks like a roll of the dice.”

For most of the leaders, the move has caused domestic politics to shift alarmingly into the foreground. Both Mr. Sarkozy and Germany’s Chancellor Angela Merkel face elections soon that will depend on their success in stabilizing Europe. French newspapers reported that Mr. Sarkozy’s re-election ambitions have been jeopardized by the move.

At the summit, G20 leaders will try to persuade markets – and Chinese state investors, who they are courting for investments and loans – that several weeks of Greek uncertainty will not send the euro zone into collapse. But their pronouncements carried palpable tones of unease, as well as anger at Mr. Papandreou.

“The summit last week was to deal with the uncertainty in the euro zone ... and this grenade is thrown in just a few short days later,” Ireland’s European Affairs Minister Lucinda Creighton told Reuters Tuesday. “Legitimately there is going to be a lot of annoyance about it.”

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