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Referendum or not, Greece's debt crisis unsolved

Greek Prime George Papandreou Minister walks for a cabinet meeting at the Greek Parliament on November 3, 2011 in Athens.

ARIS MESSINIS/AFP/Getty Images

Greece has scrapped its explosive plan for a referendum on the European bailout as Prime Minister George Papandreou struggles to hang on to power.

The prospect of no referendum sparked optimism in global financial markets Thursday that a European rescue plan for the bankrupt country might still be salvaged.

The Greek people almost certainly would have said no to the European bailout and the draconian austerity measures that come with it.

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Today, though, Mr. Papandreou told his cabinet he could scrap the referendum if the opposition agrees to back him.

"I will be glad even if we don't go to a referendum, which was never a purpose in itself," Mr. Papandreou said in the text of his talk to the cabinet, which was released to reports, according to Reuters. "I'm glad that all this discussion has at least brought a lot of people back to their senses. If the opposition comes to the table to back the bailout, a referendum is not needed."

Mr. Papandreou's referendum threat plunged Europe into a new round of political and economic turmoil this week.

But that doesn't mean taking the referendum threat off the table now will save Greece from default or guarantee the integrity of the 17-member euro zone.

"The markets may like the idea of the referendum being shelved, but it doesn't resolve the underlying issue that Greece will never be able to repay its debt," remarked Michael Hewson, an analyst at CMC Markets in London.

"Will Greek people stand for having their right to be heard snatched away and subjected to another 10 years of austerity? I doubt it."

What the latest crisis shows is that Europe's politicians – and more importantly, its people – remain deeply divided over how to extricate themselves from a deepening debt crisis. And the once unconditional commitment to the common currency is wavering even among long-time backers.

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The political situation in Greece is still extremely volatile and the risk that it will default on its debts remains high. The collapse of Mr. Papandreou's government, a general election or even a unity government are all possible.

And whether the country accepts the bailout cash, or opts instead to default and perhaps bolt from the euro zone, the road ahead looks long and troubled for the country.

Mr. Papandreou took a gambit that he could get a better deal from his European neighbours if he threatened to let Greek people have a say. Instead, it hardened attitudes in the rest of Europe, and caused a deep rift with his own government.

And that in a nutshell is the looming problem facing Europe. Greece is not alone in needing a bailout to cover its debts and recapitalize its banks. Investors are demanding steep interest rate premiums to continue lending money to Spain, Portugal and Italy.

Like the Greeks, the people of those countries are unlikely to accept massive budget cuts that would plunge their economies into recession and make them all poorer.

And the people in the countries with more manageable debt levels and stronger economies, such as Germany and France – aren't willing to make themselves poorer to prop up their neighbours.

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The more the poorer countries push back, the less likely Europe's wealthy countries are to compromise.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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