Prime Minister George Papandreou took the first steps Saturday to try to form a unity government with the opposition, which he said was necessary to steer the country out of danger. But by Saturday evening, the two sides seemed locked in position, with the prime minister making no immediate move to leave power — a key demand of the opposition — and the opposition leader reiterating his call for early elections and branding Mr. Papandreou “dangerous for the country.”
While such stands may be nothing more than clever negotiating strategies to win concessions, any sign that Greece may be headed for a poisonous stalemate is sure to rattle other European leaders — and creditors — craving stability.
The continued political upheaval comes at a time when Europe can least afford it.
The European Union wants the Greek Parliament to approve a new debt deal as quickly as possible to guarantee continued foreign support and avoid the risk of default on its debts. To the extent that the financial crisis is partly a matter of perception, any delay would be problematic. But with Italy already at risk, analysts say, further delay could be disastrous, allowing the contagion to spread there.
“It’s not just about Greece, it’s about the whole situation of overhung debt in Europe, of Italy and others which are more capable of bringing down the system,” said Ian Lesser, the executive director of the German Marshall Fund’s Brussels office.
Some of the damage has already been done.
Fears over Greece have already helped to compromise Italy’s position, pushing its borrowing costs to 6.5 percent, a record high since the country adopted the euro and a burden the country might not be able to bear for long. High borrowing costs helped tip Greece, Portugal and Ireland into deep enough trouble that they needed bailouts.
Those costs could ease on Monday. But analysts say coming up with a workable plan in Greece — or even just papering over its problems — will be necessary to buy time for Italy, which is mired in its own deep political troubles and which would be much more difficult to bail out because its economy is larger.
Charles Grant, the director of the Center for European Reform, a research institute in London, said that if Greece defaulted or prepared to leave the euro zone before the bloc could build a big enough bailout mechanism “and before there’s a credible Italian government,” it could “bring down the whole euro system.”
“That is why Merkel and Sarkozy will do anything they can to persuade whoever is running Greece to take things slowly, to follow the medicine, to carry on pretending they can pay the debt when everyone knows they can’t,” Mr. Grant said, referring to Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France.
The proposal for talks to form a unity government followed a roller-coaster week of intense brinkmanship. Mr. Papandreou proposed a referendum on Greece’s new debt deal with the European Union — roiling world markets and spooking Europe — before coercing the opposition to back the deal and just as quickly calling off the referendum plan.
But as the dust settled Saturday, it was still unclear whether Mr. Papandreou’s referendum gamble was a brilliant strategy to hasten passage of the debt deal, which is Europe’s best hope to create a firewall around Greece, or whether it achieved a short-term political gain while dooming the government’s ability to work with opponents to approve the agreement.
It dictates the approval of a series of austerity measures the government has already agreed to and imposes a permanent foreign monitoring presence. Amid growing social unrest, the Socialist government might not have the ability to pass the necessary legislation on its own, hence Mr. Papandreou’s appeal for broader consensus. NYT