Greek Prime Minister George Papandreou’s surprise call for a referendum on a new bailout package has thrown Europe back into full crisis mode and renewed fears of a euro zone split.
A rejection by Greek voters of Europe’s latest rescue plan would likely lead to a sovereign debt default by the bankrupt country, spreading cascading banking and debt woes across the continent and beyond.
A revolt within Mr. Papandreou’s socialist Pasok party has further clouded Europe’s increasingly muddled economic and political prospects.
Stocks fell, the euro tumbled and Italian bonds plunged on fears that financial panic could soon spread to other heavily indebted countries. By midday, the German DAX index was down by 5.3 per cent and the French CAC 40 off 4.2 per cent.
The latest flare-up comes as leaders of the world’s 20 largest economies are preparing to meet Thursday in Cannes, France, to discuss global economic problems.
Just last week, investors worldwide were cheered by a sweeping package of reforms aimed at bolstering confidence in the euro and working out sovereign and commercial bank debts in an orderly fashion.
Greek cabinet ministers were due to meet today in Athens amid reports that several party members had defected, leaving Mr. Papandreou’s narrow majority in the Greek Parliament at risk. He currently holds just over half of the 300 seats.
Mr. Papandreou is facing a non-confidence vote Friday that could topple the government. He narrowly survived a similar vote in mid-October.
The country has been wracked by increasingly violent and disruptive protests in recent months as Greeks balk at severe austerity measures demanded by other euro members and creditors as a precondition for reworking its crushing debts.
The deep budget cuts and tax hikes would almost certainly be defeated if put to a vote.
“If it continues with Papandreou and the referendum, we will end up with a default and the default will push us into the drachma,” said former Greek Finance Minister Stefanos Manos in an interview with Dublin-based broadcaster RTE today. The referendum call puts in jeopardy the payment of the next instalment of bailout funds by the International Monetary Fund and the European Union, he said.
Greek’s rejection of a strict austerity diet would also harden attitudes in Germany and France, where tax payers are already bitter about bailing out their poorer euro neighbours.
“The crisis in the country has taken on uncontrollable dimensions and threatens the cohesion of Greek society,” said lawmaker Milena Apostolaki, who said she will defect from Pasok. “The titanic effort needed to exit the crisis needs national acceptance and social support. A referendum is a deeply divisive process. I want to express my categorical disagreement with this initiative of the government.”
Grumbling about throwing Greece out of the euro has already begun. German Christian Social Union lawmaker Hans Michelbach said Mr. Papandreou’s referendum call casts doubt on his country’s reliability as a euro member.
“Euro zone states last week reached a solution of the sovereign debt crisis, especially in Greece, after months of hard work,” said Mr. Michelbach, whose CSU party is the Bavarian sister party of Chancellor Angela Merkel’s Christian Democrats and one of three coalition parties.
“That calmed markets down and created new confidence,” he said. “Greece’s head of government Papandreou has now willingly damaged this confidence, the work of months.”
Even if the sweeping debt agreement holds and Greece is spared default, Europe’s economic prospects look increasingly grim. Most European countries are facing deep budget cuts to deal with mountains of debt, high unemployment, stingier bank lending and falling exports.
Europe itself risks sliding into recession – a prospect that could harm economies as far away as Canada, the United States and China.