Greek referendum: Papandreou 'dancing on a volcano'

EU, Greek and revolutionary flags in Athens. 2 Nov 2011
Image caption Athens has been the scene of repeated angry protests against austerity measures

It is just a week since Greek Prime Minister George Papandreou was heralding "a new day for Greece and a new day for Europe" after marathon talks in Brussels to ease the country's debt burden.

There was a palpable sense of relief as EU leaders emerged from late-night talks, hammering out the deal which would write off half of Greece's debt and give another 100bn euros (£86bn; $140bn) to the country in new bailout funds.

But now, in one stroke, that relief has turned to panic, the whole agreement is threatened with disaster and markets worldwide have plummeted. The cause: the astonishing announcement by Mr Papandreou that a public referendum would be held on whether Greece should accept this latest debt deal.

He called it "a supreme act of patriotism and democracy", but many both in Greece and elsewhere would instead see it as a supreme act of misjudgement.

There is the feeling here that Greece can ill afford more instability and uncertainty and yet the call for a referendum creates just that.

Polls show the majority of Greeks are against the austerity measures and have a negative view of the latest debt deal.

If the No vote were to win in a referendum, it would lead Greece to declare bankruptcy, default on its debt and possibly force it to leave the euro altogether.

Nation 'divided'

One MP, Milena Apostolaki, has already defected from Mr Papandreou's Pasok party after the referendum announcement.

She told me: "At this extremely difficult time, the priority must be to make all the sacrifices of the Greek people worthwhile. But this plan divides the nation and puts at risk Greece's European perspective."

Other Pasok MPs have threatened to follow suit. With six senior party members openly calling on Mr Papandreou to resign, it is clear that the referendum plan has thrown Greece into a political crisis, to add to its financial woes.

European leaders reacted furiously. A senior member of Germany's governing coalition called it "an attempt to wriggle out of the deal". French President Nicolas Sarkozy said the move "surprised all of Europe". George Papandreou is likely to face a serious dressing down from the French and German leaders at the G20 summit in Cannes.

Ordinary Greeks, too, have been caught off guard. This country last held a referendum in 1974 when people voted to abolish the monarchy after a military dictatorship. There was no talk of a referendum after the previous two bailout deals negotiated in Brussels. Nobody here expected it to come this time.

A gruelling seven-hour cabinet meeting on Tuesday led to what the prime minister's office called "unanimous support" from the government. But beneath the surface, there are serious misgivings among many Greek politicians.

"The Prime Minister is tossing Greece's EU membership in the air like a coin", said a spokesman for the opposition New Democracy party.

They are also furious at a decision by Mr Papandreou to replace senior members of the armed forces, ostensibly because they opposed his plans for military spending cuts.

Image caption George Papandreou summoned an emergency cabinet meeting after a day of turmoil on Tuesday

The move stirs uncomfortable memories in a country that lived under a military junta for seven years. New Democracy called it an attempt to fill the army with party faithful before fresh elections, which they want to be called immediately.

While Mr Papandreou insists elections will not come earlier than the scheduled poll in 2013, his government is now teetering on the verge of collapse.

He has called a confidence motion in parliament on Friday. With a majority of just two MPs since the defection of Ms Apostolaki, any victory would be on a knife edge. If he loses the vote, the government would break down and no referendum would take place at all.

So why did the prime minister make this high-stakes gamble?

One school of thought is that he wanted to shift responsibility for the austerity measures from his shoulders to those of the Greek people, so that in the case of victory he would be able to push on with his policies, reinforced by a popular mandate.

Another is that he is simply throwing in the towel, trying to leave Greece's political stage after realising that the depth of hostility here against him is irredeemable.

But he may also be banking on this - that while the majority here are hostile to the bailout terms, polls show that most Greeks also want their country to stay in the euro.

If the referendum question could be framed in terms of remaining in the eurozone or making a disastrous exit, he could yet win and strengthen his hand considerably.

It is, though, an extremely dangerous game for an already embattled prime minister.

George Papandreou is dancing on a volcano here. The question is, could that volcano erupt as early as this Friday's confidence vote, and could the referendum plan bring an end to Mr Papandreou's premiership?