Pap and Merk…strange bedfellows?

George Papandreou may well turn out to be a true democrat. But it seems unlikely that the bailout referendum is entirely his idea.

The Greek government will hold a referendum on a new EU aid package, calling on voters to say whether they want to adopt it or not, Prime Minister George Papandreou said yesterday. The news unleashed a vitriolic reaction from opposition parties, which accused Papandreou of looking for a way out for his embattled party by dragging Greece through a further period of political instability.

“We trust citizens, we believe in their judgement, we believe in their decisions,” Mr Papandreou told ruling socialist party legislators, adding, “Bigger debts bring bigger austerity, and there has been a systematic effort of disinformation by certain media and political parties.”

As 60% of Greeks said – in a survey conducted last Saturday – that they view last Thursday’s EU summit agreement on a new 130bn euro bailout package as ‘negative or probably negative’, the media are now engaged in trying to second-guess what the Greek leader might be up to: does he want to woo the Greek electorate and win…or does he want to lose and thus create a deeper EU crisis?

There had been talk of calling a referendum in some form or other, but the fact that citizens would be asked to vote on the latest bailout deal came as a shock to many Greeks. It certainly took Papandreou’s backbenchers by surprise. More to the point, it has come as a catatonic shock-horror to the Brussels Sprouts.

But Finance Minister Angelo Venizelos was well aware of the plan. And Mr Venizelos is not a particular domestic ally of George Papandreou. This suggests very strongly to me that the vote idea was hatched in a more international context.

Last night, I watched as various pundits on BBC2’s Newsnight opined that “the key question” in all this was whether Papandreou would lose or not. I find myself ever-more perplexed by the Beeb’s sometimes willful ability to miss the point, and cover up this disability with drivel. The key point here is, quite simply, why in tarnation has Papandreou done this in the first place?

Several sites and news titles this morning are positioning the referendum call as a means by which Papandreou can ‘transfer responsibility to the Greek people’. I can’t see how that would help him at all. I can certainly appreciate that the move has put the Opposition on the back foot: but placing the whole fiscal recovery plan in jeopardy for temporary advantage simple doesn’t ring true.

So consider for a minute what the effect would be if, a month before the referendum is due to take place, a ‘no’ vote looks almost certain. Setting aside the likelihood that all kinds of other brown solids will be slamming into the eurofan by then, the effect on Greek bondholders is very likely to be one of panic: now even their 50% write off would be looking distinctly queasy. It is highly likely that, in such a situation, they’d settle for a 75% write-off – in preference to Greek chaos, followed by them getting nothing back at all.

Suddenly, the Greek debt load is reduced still further. Greece’s calling upon the EFSF funding is reduced and postponed. The likelihood of Germany coughing up for Greek default is also lessened. The precedent of massive debt-forgiveness is set. The chances of Spanish and Portuguese collapse thus recede. Even Italy might be saved. For once, the bankers take the biggest hit: not only is this popular with most EU citizens, many recapitalised eurobanks will survive…especially the already ringfenced German lenders.

Now there is a new deal, and the Greeks enthusiastically back its far less onerous terms in the ensuing referendum. In return for this brighter outlook, the ClubMeds stick with the EU, and acquiesce in greater control from Berlin. Papandreou not only survives in power, he becomes something of a hero.

But France’s heavily Greek-exposed banks are placed in deep jeopardy, and the French Government is forced to bail them out. The country loses its Triple-A credit rating, and is – effectively – reduced to being a vassal of Germany.

Merkel’s victory is complete. German revenge over France is total. The banks are given a slap and a precedent to worry about. And a stronger, Berlin-directed European Union emerges…still in possession of its additional anti-crisis firepower. Britain, meanwhile, is ever more isolated.

This isn’t just speculation. Both Papandreou and Venizelos made a high-profile visit to Berlin a few weeks back…for no apparent reason. Also notable was the ease with which Greece suddenly found four weeks more money when the German’s stonewalled on the new bailout tranche soon afterwards. And, of course, there was Germany’s sudden discovery last week that it had ‘found’ 58bn euros it didn’t know it had. This is not the sort of thing Germans tend to do.

Games are being played here, on one level or another. Personally, I think the chances of this sort of speculated scenario being pulled off are minimal. But I would bet the farm that some form of thinking in this general area lies behind what is, otherwise, an inexplicable decision by Papandreou. The Slog wondered some weeks ago what side-deal was being promised to the Athens mob in return for imposing appalling levels of austerity upon its people. This latest development may well represent a major clue as to why the Greek Government has remained ostensibly loyal to Brussels.

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