CANNES, France — The future of Greece’s government – and with it, the extensive bailout plans reached just days ago -- appeared to be in increasing doubt Tuesday, as Greek Prime Minister George Papandreou shocked world leaders by calling for a referendum on Greek participation in the rescue package.
Markets plunged around the world on the news — the Dow had dropped nearly 2.5 percent at closing bell — and it seemed uncertain whether Papandreou would survive a confidence vote scheduled for Friday. One member of Papandreou’s slim Socialist parliamentary majority quit the party on Tuesday, and still more called for him to resign. Another said she wanted a unity government to steer the country through the economically treacherous months to come. Since Papandreou now has just a two-vote majority in the 300-seat legislature, the outcome of the vote of confidence seemed deeply in doubt.
Luxembourg Prime Minister Jean-Claude Juncker told a Luxembourg radio station on Tuesday that the referendum “is something that brings a great nervousness, that adds great insecurity to already great insecurity, and therefore we need to see calmly how we will deal with this.” He said that that Greece could wind up bankrupt if it votes down the bailout plans.
On Tuesday afternoon, French President Nicolas Sarkozy called an emergency meeting of his senior advisers to discuss the situation. After speaking with German Chancellor Angela Merkel by phone, Sarkozy said in a statement that “France and Germany, with their European partners, are determined to ensure without delay the full implementation of decisions adopted by the summit, which are necessary today more than ever.”
Sarkozy, Papandreou and Merkel, along with other European officials, planned to confer on Wednesday in Cannes ahead of a G20 summit whose agenda has now been thrown into disarray.
Greek Finance Minister Evangelos Venizelos was hospitalized early Tuesday with stomach pains after Papandreou announced the plans late Monday night. From the hospital, he spoke by phone to top European officials.
By the time markets closed Tuesday in Europe, France’s CAC and the German DAX indexes had plummeted around 5 percent. London’s FTSE 100 was down about 2 percent. The market plunge wiped out the gains that followed last week’s approval by European officials of the crisis management plan
U.S. markets remained in decline throughout the day, with the Nasdaq closing down at 2.9 percent and the S&P 500 dropping 2.8 percent.
Details of the new rescue plan are supposed to be negotiated with the IMF and European officials in coming weeks. After weathering intense criticism in Greece over the current bailout plan’s inability to revive the economy, Papandreou said it was up to the people of Greece — frustrated by severe budget cuts, tax increases and public-sector job losses — to decide if they want to continue.
It is “time for the citizens to reply responsibly,” Papandreou said. “Do they want us to implement it or reject it? If the people do not want it, then it shall not be implemented. If yes, we shall proceed.”
If Greece refuses to go along with the demands of its international lenders, international loans to the country would halt, and it would likely default on its bond payments — a potential blow to Europe’s — and the world’s — broader economy.
The brief sense of relief that followed the agreement on the crisis plan has been steadily eroding: Investors have driven up interest rates on Italian bonds since then, and analysts have cast doubt on basic aspects of the crisis plan. The possibility of a rejection by Greek voters may prove to be the coup de grace.
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.