Future of the euro zone in the air

Sonya Khanna

Business Editor

Greek Prime Minister George Papandreou surprised G20 leaders and investors Monday with a startling announcement to impose a referendum to determine Greece’s continuing use of the common currency.

Worldwide markets plummeted Tuesday following the surprise referendum announcement due to apparent investor caution regarding the G20 summit to strengthen efforts to prevent the debt crisis in Greece from negatively impacting the largest economies in Europe.

“Europe’s much-heralded grand strategy appears to be rapidly unraveling,” said French bank Societe Generale economist James Nixon. “The announcement that Greece is to hold a referendum on the latest austerity measures will almost certainly become a vote on Greece’s continued membership in the euro.”

French President Nicolas Sarkozy and Germany’s Angela Merkel urged a prompt decision from Mr. Papandreou upon meeting in Cannes prior to the G20 summit of major world economies. The crisis talk came in effort to push swift action of Greece by mid-December on whether they plan to stay in the euro zone. Greece’s European counterparts are pressing for continued membership of the euro zone.

“The Greeks must say quickly and without ambiguity whether they choose to keep their place in the euro zone or not,” said French President Nicolas Sarkozy.

European partners and the International Monetary Fund have hinted at the possibility of putting a hold on the outstanding €8 billion aid instalment to Athens until after the pending referendum; the financial aid instalment will be the sixth of the €110 billion bailout package negotiated with the EU and the IMF. Finance ministry spokesman Martin Kotthaus indicated no immediate need for the payout until mid-December.

Greece was due to receive 8-billion in new loans later this month – the sixth instalment of the €110-billion bailout package negotiated with the EU and the International Monetary Fund last year. The Friday confidence vote (if it goes against the government) and the referendum call into question continued support from the EU and the IMF.

Cabinet members have harshly criticized Papandreou of endangering euro membership amid the unpopular decision to call for a referendum after battling to gain backing.

“The referendum will be a clear mandate and a clear message inside and outside Greece on our European course and participation in the euro,” said Papandreou.

Although Papandreou believes strongly in his course of action, EU leaders are strongly in favour of the bailout plan, citing potential dire consequences if Greek citizens opt for an alternative plan.

According to analysts, threats of the referendum on markets as well as the future of the euro zone include potential decline of Greek austerity programs, indicating the possibility of a rise in the budget deficit.

The referendum process is set to begin Friday with a vote of confidence in the Greek parliament on Friday. Unless European Union leaders prompt Mr. Papandreou to viagra pharmacy change plans, the referendum will likely go through in the case that the confidence vote goes through.

Greek officials have indicated the referendum will potentially be held mid-January, but Greek government spokesman Ilias Mosialos cited the urgency to hold the referendum “as soon as possible” following immediate action to sort out the intricacies of the bailout deal.