Rational Irrationality: Beware of Greeks Bearing Referendums - by John Cassidy

On Monday night, the nation’s Prime Minister, George Papandreou, shocked his colleagues, his countrymen, and the rest of the world by announcing he would hold a referendum on a new bailout package, which other European countries agreed upon last week as part of a broader effort to contain the continent’s debt crisis. Today, markets everywhere are plunging, which is hardly surprising.


Just when it seemed like there was going to be a respite from the debt crisis, albeit perhaps a temporary one, Papandreou has thrown the whole thing into question again. If the Greeks were to vote down the European rescue package, which involves yet another round of austerity measures, they would be opting for a sovereign debt default, and, in all probability, Greece’s exit from the euro zone. Even if the Greeks approve the package, the markets face two months of chronic uncertainty before a vote not expected until January.

With a parliamentary majority of just three votes for his Socialist Party government, Papandreou appears to have seen a referendum as a clever political gambit. While most Greeks oppose the tax increases and budget cuts that have come with successive European bailouts, they still strongly support membership of the European Union. In offering voters a referendum, Papandreou is effectively asking his countrymen to choose which option they like least: more austerity or an exit from the euro zone.

For more: Rational Irrationality: Beware of Greeks Bearing Referendums : The New Yorker