Papandreou’s Dangerous Game

At first glance it is difficult to understand what could possibly have motivated Greek Prime Minister George Papandreou to announce a public referendum on the Greek debt deal. Any sense of stability that had been achieved by last week’s summit meeting of Eurozone leaders, and the news of a deal to prevent the region’s debt crisis from spreading, has been irretrievably lost.

In order to qualify for emergency funding, Greece was tasked with getting its financial house in order. The so-called “austerity” measures to accomplish this goal have centered on the imposition of new taxes together with deep spending cuts. Public opposition remains vehemently opposed to these actions and it is far from a certainty that a referendum would support further efforts to contain the deficit.

If Greek citizens were to refuse to support the referendum thereby failing to meet the country’s obligations, would the European Union turn its back on Greece and cast it adrift?

This is difficult to say with certainty, but there is a growing sense that Greece’s continued membership within the Eurozone is growing more tenuous. A public vote rejecting efforts to impose a greater degree of fiscal responsibility would surely be seen as poke in the eye to those countries fronting most of the money that has enabled Greece to pay its bills for the past year.

Stronger Mandate or Economic Blackmail?

So, what exactly does Papandreou hope to accomplish with this unnecessary action? Is Papandreou truly concerned with giving the public an opportunity to participate in deciding the country’s future or is this simply an attempt to avoid meeting the terms and obligations of the Eurozone’s debt plan?

If it is the latter, then Papandreou is counting heavily on the Eurozone’s fears that allowing Greece to default would result in unacceptable damage for both the region and the euro. On this, Papandreou may be skating on thin ice.

Having already provided much of a 130 billion euro bailout, Eurozone officials may opt to simply cut their losses. It would be a straightforward matter to redirect money ear-marked for Greece to the banking system to help cover the large Greek exposure many banks have on their books. By insulating the financial system from further losses in this manner, the need to respond to Greece’s pleas for more cash is significantly diminished.

Such a forceful action may also send a message to other countries like Portugal and even Italy who may harbor similar thoughts that the EU will never allow them to default.

The likely date for a referendum is early next year but there is another event this week that could change the Greek landscape before then. A confidence vote is scheduled for this Friday and Papandreou’s precarious hold on power is fading quickly. Two member’s of Papandreou’s government have vowed to sit as independents while a collection of government members have called on Papandreou to resign in a letter sent earlier today to the media.

No matter the outcome of Friday’s vote, one thing is certain – the possibility of the rally following last week’s Eurozone summit extending into the new year has been dashed.

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