Greece backs off referendum, dealing blow to euro-zone equality

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In an effort to avoid a financial catastrophe, Europe's leaders persuaded Athens late Thursday to back away from a referendum, but the result, which involved threats to expel Greece from the euro zone, has destroyed any sense of democratic solidarity uniting them.

This probably staved off a devastating run on the euro that could have brought down the Italian and Spanish economies and placed France's stability in peril.

But it also ended the principle of unity among the 17 countries that share the euro: It is now possible for the wealthier members to override the democratic systems of the poorer ones.

It was self-defeating victory. In order to win passage of the bailout package, the leaders had to assert that theirs was not a common currency at all, but one in which the wealthier export-led nations held precedence over poorer, import-dependent, debtor nations.

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The ideal of a union of equal nations suffered a lethal blow, and the once-radical concept of a "two-speed Europe," almost a colonial relationship, instantly became a tangible reality.

The need for monetary stability has come into stark conflict with the electoral demands of citizens battered by austerity as world leaders gather in Cannes, France, for a G20 summit.

That tension was amply apparent on Thursday night, when French President Nicolas Sarkozy spoke 24 hours after he and German Chancellor Angela Merkel had teamed up to threaten Greece with expulsion from the currency union, and the loss of a crucial $8-billion emergency-loan instalment, if it let voters decide on a trillion-euro bailout package.

Mr. Sarkozy boasted confidently that their gambit had succeeded: The Greeks had backed away from a public vote, though possibly at the cost of Prime Minister George Papandreou's government.

While speaking loftily of democracy, Mr. Sarkozy concluded by acknowledging that the stability of the monetary union took precedence.

"We are prepared to help – that is the foundation of European solidarity," he said. "But that also means that Greece fulfills its obligations. We will not allow the euro to be destroyed. We must protect the money of our taxpayers."

But look closer, and the conflict between democracy and stability stretched much further across the summit. For Mr. Sarkozy's remarks, and his tough approach to Greece, were all prefigured by his own battle between the two principles.

France, the host of this G20 summit and an indebted and import-dominated nation itself – albeit a wealthy one – teeters on the verge of a debt-rating downgrade that would wound its economy. If such a downgrade happened, it would hurt Mr. Sarkozy's prospects for re-election in next year's presidential ballot. For France to avoid such a downgrade, Mr. Sarkozy desperately needs to keep bondholding investors confident in the euro's stability.

This urgent position has forced Mr. Sarkozy into a strictly dependent relationship with Ms. Merkel, the leader of the only economically prosperous and export-wealthy country in the euro zone – and the only nation with the resources to finance a large-scale rescue plan.

If he shows any disagreement with her message or discord over rescue plans, French government officials say, Mr. Sarkozy would create a perception of uncertainty and run the risk of a downgrade. So his own electoral fate is equally tied up with accepting stability at any cost.

Furthermore, Ms. Merkel herself sits atop a teetering conflict between stability and German democracy – one whose stakes are arguably at the root of this week's Greek-bailout crisis.

Most analysts believe the trillion-euro package should have been deployed a year ago, when the scope of the Greek debt crisis became fully apparent. Ms. Merkel, though, was forced to avoid the issue because her party faced crucial elections earlier this year, and any mention of spending taxpayer money on the wider European crisis, and especially on Greece, was considered politically suicidal.

As a result, the German government was forced to abandon the larger goal of monetary stability for the more immediate one of political victory – and this week has forced Greece to make the opposite choice.

French and German officials told reporters at the summit that Europe could not afford the consequences of Greece's democratic gamble, in which Mr. Papandreou had hoped to win a mandate from voters who have already faced two years of devastating austerity measures, and would face even worse ones under the new package.

"We respect their democratic traditions, but a referendum – or even the delay caused by holding a referendum – would unleash hell on the markets, and that would destroy Greece and Italy and possibly Spain as well," said a German government finance official.

That seemed to be the consensus. Prime Minister Stephen Harper acknowledged as much in his remarks to reporters.

"This is obviously a decision the Greeks have to make," he said, "but I think the strong preference of everybody around the G20 table would be for progress to be made toward the package the European Union put together last week," rather than a referendum. "I think that's a strong preference."

Mr. Sarkozy's momentary victory was tainted by the dark stain the conflict left on a G20 summit that he had hoped to use to advance his own, electorally friendly agenda: Pushing China to revalue its currency, pressing leaders to adopt a financial-transaction tax, and taking steps toward alleviating world poverty. At this point, those goals have been pushed far away from the headlines, if not from the summit agenda.

"For the moment, Europe appears to have wiped the agenda of any other business," Mr. Sarkozy acknowledged, "and wouldn't you think there is other pressing business for the world's top club to deal with? You would not think so here – it is a measure of just how critical for the rest of the planet Europe's woes have become."