Greece’s Referendum Plan Shocks the World

Sources:
CNN: Greece’s Prime Minister Optimistic Referendum Will Pass
FT: EU Suspends €8bn in Greek aid
FT: EU Leaders Battle to Save Greece Deal
Spiegel: EU Shocked and Furious at Greek Referendum Plan
WSJ: Europe's Greece Ultimatum

On Monday, Greek Prime Minister George Papandreou announced that the bailout agreement European leaders reached last week during the Eurozone Summit must go through a referendum (a popular vote) before Greece will accept its terms and conditions. The agreement calls for Greece to receive €130 billion of aid in return for drastic spending cuts that will negatively affect many Greek citizens. The bailout agreement allows for an “orderly” default, while rejecting the package would lead to an immediate (“messy”) default that may jeopardize the economic stability of the entire Eurozone. It is this fear that caused many observers to strongly question the wisdom of a referendum.

Many European leaders, including French President Sarkozy, have said that if Greece opts not to adhere to the deal reached last week, it must leave the Eurozone. After facing such criticism from European leaders and his own party, Prime Minister Papandreou backed down on the referendum plan on Thursday. Instead, the Prime Minister sought a bipartisan alliance with Greece’s conservative opposition to form a governmental consensus on the bailout, which he says would negate the need for a popular vote. Prime Minister Papandreou appeared confident that such a consensus existed after the conservative opposition promised to support the terms of the bailout.

In response to these mixed signals on Greece’s commitment to remaining part of the Eurozone, European leaders have suspended the disbursement of €8 billion from the European Union and International Monetary Fund aid package. The European leaders made it clear that Greece will not receive the funds until it agrees to the new deal. Without the next disbursement Greece will likely be unable to make to make €8 billion in bond repayments due on December 19, at which time a “messy” default would begin.