Athens – European markets slid dramatically on Tuesday after Prime Minister George A. Papandreou stunned the continent’s leaders with a surprise announcement late Monday that his government would hold a referendum on a new aid package for Greece.
The proposed ballot measure would put Greek austerity measures — and potentially membership in the euro zone — to a popular vote for the first time, risking Mr. Papandreou’s political future and threatening even greater turmoil both among the countries that share the single currency and further afield.
His announcement sent tremors through Europe’s see-sawing markets on Tuesday, with bank stocks taking a particular hammering because of their exposure to Greek debt. At midday, the German DAX index was down by 5.3 per cent while the French CAC 40 had slipped by roughly 4.2 per cent. In Britain, which is not a member of the euro zone but trades heavily with continental Europe, the FTSE 100 index was down by around 3.2 percent.
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President Nicolas Sarkozy of France was expected to speak with Chancellor Angela Merkel of Germany by phone during the day on Tuesday to discuss the referendum, which took both leaders by surprise, Agence-France Presse reported. The French president was said to be “dismayed,” according to Le Monde, citing an unnamed confidant of Mr. Sarkozy.
The German Finance Ministry deflected questions in a statement early Tuesday, saying that the call for a referendum “is a domestic political development on which the German government has no official information yet and which therefore it will not comment on.”
But Rainer Brüderle, a senior member of Ms. Merkel’s governing coalition and a former finance minister, said in a radio interview on Tuesday that he was “irritated” by the move, which he called “a strange thing to do.”
“This sounds to me like someone is trying to wriggle out of what one has agreed to,” he was quoted by Der Spiegel as saying.
Mr. Papandreou’s surprise promise of a vote on the austerity package introduced a note of uncertainty in what had seemed to be a done deal, threatening a comprehensive agreement reached by European leaders last week to shore up the euro zone. A rejection by the voters would also be likely to be treated as a vote of no confidence in the government and lead to early elections.
The anxiety stirred up by those fears hammered United States financial markets on Monday, showing once again how the domestic politics of even the smallest members of the European Union can create troubles that not only threaten the currency but also reverberate around the globe.
Addressing lawmakers on Monday evening, Mr. Papandreou said the decision on whether to adopt the deal, which includes fresh financial assistance, debt relief and deeply unpopular austerity measures, properly belonged to the Greek people.
“Let us allow the people to have the last word, let them decide on the country’s fate,” he said.
It was unclear how the referendum would be worded, but Mr. Papandreou said it would be a vote on whether or not Greeks supported the debt deal and the program of austerity measures in exchange for foreign aid.
The stakes are extremely high. A no vote could break the deal between Greece and its so-called troika of foreign lenders — the European Union, the European Central Bank and the International Monetary Fund — which have demanded structural changes and austerity measures in exchange for aid.
Without the aid, Greece would not be able to meet its expenses and would default on its debt, sending shock waves through the euro zone and the world economy.
A yes vote, on the other hand, would move the package forward, effectively shifting responsibility for the nation’s painful economic choices from Mr. Papandreou’s Socialist Party onto the public. That outcome would help Mr. Papandreou shore up his political position and avoid the instability of early elections.
The center-right opposition has opposed the bulk of the austerity program, and the prime minister’s popular support has dwindled as Greeks have been hit by a seemingly endless series of tax increases and wage and pension cuts. On Sunday, the center-left newspaper To Vima reported that a majority of Greeks viewed the deal negatively.
The leader of Greece’s main conservative opposition party New Democracy, Antonis Samaras, told reporters in Athens on Tuesday that his party would do whatever it took to force early elections and accused Mr. Papandreou of acting selfishly by calling for a referendum.
“Mr. Papandreou, in his effort to save himself, has presented a divisive and extortionate dilemma,” Mr. Samaras said following talks with President Karolos Papoulias.
“New Democracy is determined to avert, at all costs, such reckless adventurism,” the opposition leader said, repeating his calls for early general elections. “The nation needs elections,” he said.
Mr. Samaras ignored reporters’ questions about whether he would ask his 85 members of Parliament to resign, a move that would lead to the dissolution of Parliament. General elections are scheduled for 2013 when Socialist party’s four-year-term is set to expire.
Mr. Samaras is expected to clarify his stance in a scheduled session of his party’s parliamentary group on Wednesday.
But at a time when Mr. Papandreou is under intense political and social pressure, including from members of his own Socialist Party, the move was seen as the last card he could play.
It also appeared to give the Greek government a bit more leverage in negotiations with Europe. The terms of the deal, in which banks have been asked to voluntarily take a 50 percent write-down on Greek debt, have not been finalized and must still be accepted by the banks. Putting the package up for a vote, with the distinct possibility of rejection, could induce banks to agree to the deal rather than face greater losses if Greece defaults.
“It’s not motivated by the intention of some sort of brinkmanship with Europe, but it may have this sort of positive or negative effect,” said George Pagoulatos, a professor of European politics and economy at Athens University of Economics and Business. “It raises the stakes. It’s about, ‘Will we remain in the euro with a lower public debt, or will we lose everything that we will achieve?’ “
Mr. Papandreou also said that he would seek a parliamentary vote of confidence in his administration, just four months after winning a similar vote before pushing an earlier batch of austerity measures into law. The vote of confidence is expected to be held on Friday, and he is expected to squeak by with his narrow three-vote majority in Parliament.
The referendum will probably be held in January, government officials said, essentially buying the government time while the details of the deal are hammered out.
Addressing lawmakers on Monday evening, Finance Minister Evangelos Venizelos framed the debate as one of Greece’s staying in the euro zone, the group of 17 European Union countries that use the euro, or not. “It’s for the people to decide to stay in Europe or go back to the drachma,” he said.
While the austerity measures have proved incendiary for much of the public, setting off widespread strikes sometimes accompanied by episodes of street violence, being part of the euro zone generally meets with high approval.
Takis Michas, a political analyst with Forum for Greece, an Athens research institute, said posing the question this way was “a master stroke on behalf of Papandreou in the sense it is forcing the various parties to take a very responsible position.”
“If he succeeds in framing the issue as being one of remaining in the euro zone, obviously he is going to get a huge yes,” Mr. Michas added. “But it depends on whether he can frame the question in those terms.”
Under the Greek Constitution, the government must propose the language of the referendum, which would need to be approved by Parliament and then by the president.
Some analysts said the referendum was an invitation for instability. “When the debate is very passionate and things are tense, holding a referendum could be risky,” said Alexis Papahelas, the editor of the center-right daily Kathimerini.
If the referendum fails, he said, “we have a very big chance that the country would go into a disorderly default.”
A spokesman for the center-right New Democracy Party, Yiannis Michelakis, said a referendum was dangerous. Mr. Papandreou, he said, “has tossed Greece’s future in Europe in the air like a coin.”