Greek bailout – and Papandreou's premiership – in jeopardy

The Greek bailout isn't the only thing in doubt after Prime Minister George Papandreou said he will put what Europe took to be a done deal to a referendum. His government could fall this week.

Greek Prime Minister George Papandreou is fighting for his political survival after his call for a referendum on the latest EU bailout package for his country led to a revolt within his own party, the socialist PASOK.

But outside Greece, after a first wave of anger and irritation from its EU partners, a number of European politicians and economists have declared sympathy for Mr. Papandreou’s decision.

One PASOK MP, Milena Apostolaki, left the parliamentary group earlier on Tuesday. She said she would stay in parliament as an independent member in order to fight the referendum. “I have an obligation to resist this erroneous political choice that divides the nation,” she said. Her defection narrows Papandreou’s already slim majority in the Greek parliament to two votes.

Two other PASOK lawmakers called for a government of "national unity," a coalition including the main opposition party, the center-right New Democracy. Six other leading members of his party asked the prime minister to resign. Papandreou has not just called for a referendum but also announced a confidence vote on his government, to be held either this Thursday or Friday.

That schedule may prove optimistic according to Jason Manolopoulos, managing partner at the investment firm Dromeus Capital. “The talk here in Athens is that Papandreou might not make it through the night. He may resign or be ousted within the next few hours,” Mr. Manolopoulos said. “It’s bizarre, because what he achieved at the summit in Brussels last week was not bad. The debt write-off he got may not be enough, but it was a start. Now Greeks are perplexed by his course.”

Not just Greeks, to be fair. Papandreou’s announcement triggered angry responses from all over the eurozone and a flurry of diplomatic activity. German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet for yet another crisis meeting on Wednesday, ahead of the G20 summit in Cannes. International Monetary Fund chief Christine Lagarde and Papandreou himself will take part in the discussions.

In the turmoil following Papandreou’s announcement, it was easy to miss the voices supporting his course. In Germany, Peter Altmaier, chief whip of Angela Merkel’s conservative Christian Democrats, told Spiegel magazine that the referendum plans were a sign of Papandreou’s resolve to push through the austerity measures and fiscal reforms demanded by the EU and IMF.

Gustav Horn, a leading German economist, called the plan a “stroke of genius.”

“Asking the Greek people for their opinion on such a serious issue has long been overdue,” Mr. Horn said. “If Greeks vote No, they will probably have to leave the euro. But if they vote Yes, Papandreou has the backing he needs to save the Greek economy and play an important part in the stabilization of the eurozone.”

But will Greece have the time to conduct a referendum, and will the eurozone have the time to wait for a result? Simon Tilford, chief economist at the London-based Centre for European Reform, does not think so. “Today we saw a dramatic jump in the cost of borrowing for Italy,” he said. “The respite we had after last week’s EU summit didn’t last very long, and the current events in Greece are not just increasing the likelihood of a disorderly default there, they also contribute to contagion in Italy and Spain.”

As of now Italy is still solvent. But if it has to roll over its debt at such high costs, Mr. Tilford warns, it won’t be much longer, and then Europe has a real problem.