3 November 2011 Last updated at 13:37 ET

Article written by Mark Urban Diplomatic and defence editor, Newsnight

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Papandreou blinks first in euro poker game

 

ATHENS - The last 24 hours have seen all manner of political gyrations here. If one had to sum up what it has all meant, it is that the government of George Papandreou has felt the heat from Europe's most powerful players and realised that it cannot take it.

This city is still wracked with rumour about how he might bring Greece through this acute phase of its ongoing crisis, but the prime minister seems to have realised that either he, or his plan to put the European Union's bail out package to a national referendum, will have to go.

German Chancellor Angela Merkel on Wednesday characterised Mr Papandreou's proposed vote as a game of poker, and she was evidently determined that he should blink first.

Briefing from European Central Bank and EU officials that failure in the referendum would force Greece out of the euro and, some suggested, of the EU itself has startled many people here.

Soundings of public opinion suggest that most could oppose the bail out because of its accompanying austerity measures, but that the majority of Greeks are still in favour of remaining in the EU.

The linkage between a possible No vote and continuing membership of the union proved too much for many of Mr Papandreou's supporters, including his Finance Minister Evangelos Venizelos, who this morning withdrew his support from the referendum plan.

Many Greeks still feel they should be at the heart of Europe, and the sharp response to Mr Papandreou's referendum plan - particularly from France and Germany - put that role in jeopardy.

Speaking to his party in parliament on Thursday evening, the Greek leader said he had been told during those Cannes talks that not only would a "no" in the referendum mean leaving the euro, but that the question of rejoining would be off the agenda for at least a decade.

When I suggested this evening to an MP from his party that this type of talk could easily have been a bluff intended to intimidate Greece, they replied, "yes, but we cannot take the chance".

The issue of whether France and Germany could really precipitate a meltdown of the Greek economy by withholding as they had threatened, the 8bn euros in emergency aid needed to keep the economy afloat during the coming week is therefore unlikely to be tested.

A decision by Mr Papandreou to backtrack on the referendum plan would suggest that Mrs Merkel has won her poker game.

On Thursday morning it became apparent that the prime minister, who has a small majority, faced a big enough revolt within his party to make it unlikely that he could win a vote of confidence, and so press on with his referendum.

At times it was rumoured that he had gone to the president's office to tender his resignation.

When he appeared in front of his party in the evening, Mr Papandreou tried another option. He suggested that the opposition join him in endorsing the European bail out plan, implying that this could make a national vote unnecessary.

Until now, the New Democracy party, his main opponents, have refused to back the European rescue plan or the referendum, calling instead for immediate parliamentary elections.

Where does this all leave us? It shows that Mr Papandreou would prefer to avoid the referendum by gaining cross party support for the economic hardship that will inevitably follow acceptance of the EU bail out.

Whether people come to agree that he has successfully intimidated the New Democracy opposition into supporting these measures or whether he has overplayed his hand, infuriating Greece's creditors, and will soon have to resign are questions for tomorrow.