Greek referendum: this could get messy

 

Prime minister George Papandreou says he trusts his citizens. The markets may not

The Greek prime minister, George Papandreou. Many will suspect that his move has been driven by Greek politics and the need to bolster his fragile government. Photograph: François Lenoir/Reuters

"We trust citizens, we believe in their judgment, we believe in their decision," declared Greek prime minister George Papandreou as he announced a referendum on last week's loan package.

The first response is to applaud an outbreak of democratic spirit, a quality in short supply across the eurozone as the debt crisis has raged. The second response is to wonder how investors, who were already starting to question the solidity of last week's grand three-part rescue plan for the eurozone, will take this latest twist in the tale. Extremely badly, one suspects.

The unanswered questions include: what will the Greek people be asked? If the referendum is framed as a choice between the euro and the drachma, what happens if the Greek people choose to exit the single currency? What would be the mechanism? Would Greece default on more than 50% of its debt? If so, what would happen to the euro bank recapitalisation plan?

And did Papandreou mention his plan to Angela Merkel or Nicolas Sarkozy last week? The silence last night from Berlin and Paris suggests not. Can the EU still continue to dispatch funds to a country that could, within a couple of months, decide it doesn't want to sign up to the terms of the loan package?

There will be a natural temptation to believe that Papandreou's move is driven primarily by internal Greek politics and the need to maintain support for his fragile government. There is indeed a strong whiff of that. The trouble is that referendums, once announced by a serving prime minister, are hard to put back in the box. There's no real knowing how Greeks will vote, even if told by their politicians that austerity would be so much worse outside euroland and without the protection of a loan package.

With two months of campaigning in prospect, this plot threatens to become messy. It's not as if euroland politicians, even when times were good, had a good record of winning referendums...

Greek referendum: this could get messy | Business | guardian.co.uk

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