EUROPEAN LEADERS are struggling to contain a new outburst of turmoil in the euro zone after Greek premier George Papandreou stunned his international sponsors by calling a referendum on his country’s second EU-IMF bailout.
Mr Papandreou’s abrupt move, which took top members of his own cabinet by surprise, triggered acute concern in Europe that it would unsettle the ongoing effort to stabilise Italy and Spain.
German chancellor Angela Merkel and French president Nicolas Sarkozy summoned Mr Papandreou to a meeting tonight in Cannes to explain himself.
In a statement released late last night Mr Papandreou said the referendum would make clear the country belonged in the euro and he claimed market turmoil would be short-lived.
“The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro,” Mr Papandreou said, according to a statement released by his office. “No one will be able to doubt Greece’s course within the euro.”
Mr Papandreou said Greece’s partners will support its policies and urged a meeting of G20 leaders this week in Cannes to agree policies that “make sure democracy is above market appetites”.
The second bailout would see Greece receive €100 billion in new loans. While its private creditors would bear a 50 per cent cut on their investment, Greece must continue to pursue drastic austerity policies.
The deal is a core element of a new three-part European plan to reassert control over the debt crisis, the others being a major recapitalisation of weakened banks and an expansion of Europe’s bailout fund.
It is understood that there was no indication from Mr Papandreou that he was contemplating a referendum when euro zone leaders adopted the package at an emergency summit in the early hours of last Thursday.
In Paris last night Mr Sarkozy said the Greek announcement “took the whole of Europe by surprise”, while in Berlin officials said Dr Merkel would “read the riot act” to Mr Papandreou. The Cannes meeting comes on the eve of a summit of G20 leaders in the French city at which Europe had hoped to demonstrate to the world that a solution to the debt crisis was in prospect.
Instead, financial markets are once again in turmoil. Stock markets plunged yesterday, the euro fell nearly three cent against the dollar, Italian borrowing costs hit a new record and European bank shares dropped heavily.
It is understood the Greek prime minister faces pressure from his EU counterparts to bring forward the referendum which he wants to hold in January. Some euro zone governments are also said to have queried whether the release of an €8 billion loan which Greece needs before it runs of cash should be blocked.
EU leaders sanctioned this payment to Athens less than a fortnight ago but the money cannot be handed over until the International Monetary Fund board approves it.
Taoiseach Enda Kenny, writing in today's Irish Timessaid he is not surprised the Greek government has decided to put the rescue package to a referendum.
Minister for European Affairs Lucinda Creighton described the decision to hold a referendum as “a grenade”.
The referendum plan has led to renewed internal pressure on Mr Papandreou, with a group of six dissenters in his Pasok socialist party calling on him to make way for a “politically legitimate” administration. His four-seat parliamentary majority was further threatened when one MP left the party and two others called for a government of national unity and snap elections.
The manoeuvre by Mr Papandreou raised concern that a negative vote by the Greek people might lead to an uncontrolled sovereign default, with chaotic consequences for other frail euro countries. Yesterday Mr Papandreou faced a three-day confidence debate in the Greek parliament. He will not be there for the debate as he will be in Cannes.
In Brussels, EU Commission chief José Manuel Barroso and European Council president Herman Van Rompuy said Europe’s new rescue plan was more necessary than ever.
The White House expressed concern, saying the referendum reiterated the need for Europe to “elaborate further and implement rapidly” the plan agreed last week.