The announcement was unexpected by European leaders, who spent an intense several days of negotiation last week to develop what they hoped would be a convincing response to Europe’s financial crisis. The plan included a 50 percent reduction in debts that Greece owes to banks and pension funds around the world, and other fresh efforts to stabilize the Greek economy. Nevertheless, Greek banks and the national pension system still face investment losses in the tens of billions.
Late Monday, the German finance ministry called the Greek move a “domestic political development” on which the German government “as yet had no official information.”
A top leader of Merkel’s junior coalition partner said he was “irritated” by the announcement of a referendum. If the Greeks vote against the measures, former economy minister Rainer Bruederle told German radio, then “we’ll have a national bankruptcy” in Greece.
Though centered on the debts run up by Greece in recent years, the European crisis is much broader, casting doubt on the health of the region’s banking system, and on the ability of large, heavily indebted nations like Italy to remain solvent.
The topic will likely take center stage when world leaders gather at this French seaside resort later this week for the Group of 20 summit. Europe’s problems have dominated the summit’s developing agenda.
Other European leaders also expressed their puzzlement at Papandreou’s announcement. “I truly fail to understand what Greece intends to have a referendum about,” said Swedish foreign minister Carl Bildt, via Twitter. “Are there any real options?”
The Greek referendum “will clearly be seen as a vote on whether Greece is prepared to carry on with the austerity measures necessary to remain within the single currency,” Jonathan Loynes, chief European economist for the Capital Economics consulting firm said in a research note.
Opinion polls in the country, Loynes wrote, are often split between opposition to the austerity the country has faced, and support for remaining within the 17-nation euro currency union. Admission to the euro currency helped Greece trade more easily with other countries and gave it access to cheap financing. But in giving up its own currency, it lost important tools, such as a the possibility of a currency devaluation, that would have helped it cope with the current crisis.
Papandreou’s majority in parliament shrank to just 152 out of 300 seats after Milena Apostolaki declared herself an independent.
Another Socialist lawmaker, Vasso Papandreou, who isn’t related to the prime minister, said in a statement that “the country is in danger of immediate bankruptcy.” He called on the prime minister to call together a unity government to implement the bailout and then proceed directly to elections.
Birnbaum reported from Berlin.