Greek Inaction Or Democracy In Action?

Greece, the birthplace of democracy, may be suffering from an overdose of public input.

The decision by Greece's government to hold a January referendum on its deal with the European Union to restructure public debt has thrown the pact — and investors — onto shaky ground. Stocks around the world took a sharp dive on Tuesday's news, and other European leaders left little doubt over how they felt.

The Spanish government warned that any delay on the part of Greece in enacting the deal would be dangerous for the rest of Europe. Meanwhile, French President Nicolas Sarkozy and German Chancellor Angela Merkel set an emergency meeting with their Greek counterpart, Prime Minister George Papandreou.

"They won't say this publicly, but privately they will be telling Papandreou, 'If you say no to this, then you're out of the eurozone and you're out of the EU.' That's extreme, but I think that's what they're going to threaten," said Nariman Behravesh, chief economist at IHS Global Insight.

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With so much at stake, so much uncertainty in global markets and so much international pressure, what exactly is behind Papandreou's call for a referendum? Daniel Kelemen, the director of European studies at Rutgers University, said it's about political survival.

In the short term, Papandreou faces a confidence motion Friday that could bring down his government, which already enjoys only the slimmest of majorities in Parliament. In the longer run, getting a "yes" vote would give the beleaguered prime minister the legitimacy to go ahead with painful reforms, Kelemen said.

"He's taking a big gamble in calling this referendum, but I think there's a decent chance he would get a 'yes' vote," Kelemen said.

While the Greeks loathe the austerity measures they've been asked to swallow, Kelemen said a majority of them want to stay in the European Union and stick with the euro.

"So, if you frame the referendum such that 'yes' means we stay in the euro and undertake these painful measures while 'no' means we have to leave, I think there's a good chance it passes," he said.

Behravesh agrees. "What he's essentially saying is, 'Fine, you Europeans agreed to this but I'm going to put it to the Greek people. I'm not going to unilaterally shove this agreement down their throats,' " he said.

IHS lowered the probability of a Greek default to 20 percent after last week's debt deal but raised it to 40 percent after the referendum announcement.

"I think the markets are worried and ought to be worried," Behravesh said. "This is very much a case of one step forward, two steps back in Europe."

Will There Really Be A Vote?

But amid all the uncertainty, there's no guarantee that the announced referendum will even take place, according to Kelemen. "You can imagine a number of scenarios over the next few weeks where it might not happen," he said.

Frank Hess, a professor of West European studies at Indiana University, however, thinks the die is cast and that there's probably no going back on the promise of a referendum.

He thinks that putting the deal to a vote — especially one that looks, at first blush, like a big loser for other EU governments — could just be Papandreou's idea of a bargaining strategy.

"If they got a better deal, it would certainly increase the chances that the referendum would pass," he said.

IHS Global's Behravesh thinks that's a vain hope on the part of the Greek government.

"I can't imagine the Europeans are going to go back and renegotiate," he said.

If the referendum goes forward, the Greek people would very likely see "a massive public relations campaign that will paint a very dire picture of what happened if Greece turns this down," Behravesh said.

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