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Tuesday, November 01, 2011

The Birthplace of Democracy Rattles Its Cage

The Greek Prime Minister, George Papandreou, dropped something of a bombshell on the markets and the self satisfied Eurozone "leaders" yesterday by calling for a referendum on the latest Greek bailout and austerity package.

He told the Greek parliament:

The command of the Greek people will bind us. Do they want to adopt the new deal, or reject it? If the Greek people do not want it, it will not be adopted…We trust citizens, we believe in their judgement, we believe in their decision."

Unsurprisingly the markets are falling, and the "leaders" of the Eurozone are spitting blood at what they regard as a betrayal by Papandreou (who had promised them he wouldn't call a referendum - but hell, who trusts politicians to keep their word?).

As ever, with any referendum, the devil is in the detail. Aside from the fact that the referendum will not be held until January (leaving ample time for the markets to have a nervous breakdown), it is not yet clear exactly what the question will be.

Some are asking if Papandreou has lost his mind. I think not, it seems to me that this is a very shrewd political move.

Papandreou knows that the Greek people are less than "enamoured" with the bailout and at the prospect of having "on the ground monitoring" (as demanded by Merkel). Were he to try to push the bailout through he may well face a serious escalation of civil unrest.

By publicly placing the decision for accepting the bailout in the hands of the people, he gives them the power and responsibility to either accept the deal and "knuckle under" to decades of austerity, or throw it away and leave the Euro in a disorderly manner.

However, there is another more "subtle" strategy at play here. The more than two months before the referendum is held, gives the Eurozone "leaders" more than enough time to realise the dire consequences for their own futures if Greece publicly votes down the terms of the bailout. Papandreou knows this, and has used the referendum as a means of extracting "sweeteners" and a better deal from the Eurozone.

The calling of a referendum serves as a public reminder to the "leaders" of the Eurozone that you cannot impose economic policy by dictat.

The move by Papandreou is clever politics, but it will play havoc with the global economy.

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