Call For Greek Vote Unsettles Europe

Caught off-guard by Mr. Papandreou’s announcement, euro-zone leaders on Tuesday sent a clear message to the Greek prime minister: Calling a referendum risks a cutoff of international funding for Greece.

“The announcement has surprised the whole of Europe,” said French President Nicolas Sarkozy. “Giving the people a way to express themselves is always legitimate, but the solidarity of all the euro-zone countries cannot be exercised unless everyone agrees to make the necessary efforts.”

“France wants to stress that the plan agreed last Thursday unanimously by the 17 states of the euro zone is the only possible path to solve the Greek debt problem,” he said.

Mr. Sarkozy spoke with German Chancellor Angela Merkel and said they would press ahead with implementing the euro-zone deal agreed last week. The French president said he and Ms. Merkel would gather with International Monetary Fund chief Christine Lagarde and officials from the European Union and European Central Bank in an emergency meeting Wednesday in Cannes, and had summoned Mr. Papandreou to a separate meeting with the same officials later in the evening.

Mr. Papandreou’s decision to plan a referendum, likely to be in January, threw up a major challenge for euro-zone leaders, especially Mr. Sarkozy who has bet big that the Cannes summit would endorse the euro zone’s plan to stabilize the global economy and crown his presidency of the G-20 group of industrial and developing nations.

European leaders intended to convey a message that their 11th-hour agreement last week to avoid a messy Greek default, boost their bailout fund and stabilize the region’s banks had kept catastrophe at bay. The focus for Cannes was to discuss what the rest of the world could now do to stimulate global growth.

While officials stress the summit isn’t meant to be a pledging session, Europe’s decision to partly back its expanded rescue fund with investment from countries with large foreign-exchange reserves such as China and Japan had been set to dominate much of the meeting.

Now, Mr. Papandreou’s decision has revived the prospect of a collapse of the Greek government and of Greece being cut off from international funding, greatly complicating European leaders’ plans to rally support from the G-20 for their crisis-busting measures.

“While Greece is threatening a vote, nobody will ever give Europe the resources for the enhanced [bailout fund],” said Jan Poser, chief economist at Bank Sarasin.

The Greek decision “was unexpected and triggers uncertainty after the recent European Council meeting and on the eve of the G-20 summit in Cannes,” said Italian Premier Silvio Berlusconi.

Dutch Prime Minister Mark Rutte warned that the uncertainty could delay the implementation of the euro zone’s anticrisis package. In a parliamentary session in The Hague, Mr. Rutte called the vote a “very unfortunate development” and said “we have to do everything to prevent it.” He signaled that one option for Greece would be to make “much more use” of EU structural funds, though he declined to elaborate.

If the Greek government decides to move ahead with its plans, the referendum should center only on issues that directly affect Greece, Mr. Rutte said, and it should happen as fast as possible, he added.

Fears that the EU plan could unravel rattled financial markets. Stocks and the euro plunged.
The euro fell more than 1% against the dollar, slipping to $1.37 after on Monday enduring its biggest single-day percentage loss in more than a year.

Financial shares plummeted across the Continent, with French banks particularly hard hit as investors worried about their exposure to Greek debt. Société Générale SA sank 16% and BNP Paribas SA dropped 13%.

European officials were frustrated by the sudden turn of events and the prospect of having to wait two more months to gain clarity on the bailout, said people familiar with the matter. “We want to convey to the Greeks that there is no alternative to the existing package of measures that we agreed in Brussels,” a European official familiar with the situation said. “We need quick clarification of the Greek government’s mandate; we cannot wait until January.”

White House Press Secretary Jay Carney said the call for a referendum “just reinforces the notion” that the euro zone needs to implement the bailout plan rapidly. Mr. Carney said the U.S. will continue to work with European counterparts on the debt crisis. He said the Obama administration still has confidence in the euro zone’s ability to deal with the problem.

Mr. Papandreou’s move risks having unintended consequences on France’s domestic politics ahead of a presidential election, set for next year, in which Mr. Sarkozy is widely expected to run.

Only five days ago, Mr. Sarkozy explained in a primetime television interview the complex negotiations behind the deal to save Greece, and how the “crucial” Brussels summit, driven by the Franco-German pair, had avoided a global financial “catastrophe.”

The opposition was quick to seize the opportunity to criticize the president, who has strived to present himself and Ms. Merkel as the driving force behind the often opaque decision-making process in the EU. “Europe has acted too late and too softly on the financial front, too harshly on the economic front,” said François Hollande, the Socialist presidential candidate. WSJ