Will the Greek government survive the debt crisis?

Greek Prime Minister George Papandreou arrives for a eurozone bailout plan meeting Wednesday in Cannes, France.

Story highlights

  • Prime Minister George Papandreou faces a confidence vote Friday
  • He surprised everyone by calling a referendum on the latest European bailout
  • Analysts are divided on whether his government can survive
  • If it falls in the confidence vote, it would be unlikely to win new elections

The Greek government faces mounting internal and external pressure to resolve the country's debt crisis.

With a referendum on the latest bailout plan in the cards to the dismay of Europe, will the gathering storm be too much for the government to handle?

The first test for Prime Minister George Papandreou comes Friday, when a vote of confidence will be held in his government.

The Greek cabinet voted unanimously Wednesday to support the prime minister's call for a referendum on the hard-won deal, though some ministers cast their votes grudgingly.

But his Socialist party, PASOK, holds a wafer-thin majority, after recent defections by several lawmakers, and analysts are divided on whether the government can survive the vote.

Kostas Gemenis, an assistant professor of politics at the University of Twente in the Netherlands, said the outcome will depend largely on how those in Papandreou's own party behave.

If the defectors abstain rather than voting against the party, Gemenis said, the government will probably have enough support to survive the vote.

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While there is much resentment within the party, he said, "it's one thing to voice your differing opinion, it's an entirely different thing to ... vote against the party and be responsible for bringing the government down."

Papandreou's politicians will be very aware that if an election were to be held in the short term, PASOK would likely lose, Gemenis said, handing power to the conservative opposition.

The leader of the main opposition New Democracy party, Antonis Samaras, called Tuesday for a snap election, accusing Papandreou of playing with the country's future.

If the opposition were to win eventual elections, no one knows if the deal agreed after months of painstaking negotiations would survive -- or if Greece would remain among the euro nations.

The political turmoil prompted European Commission President Jose Manuel Barroso to issue a "very urgent and heartfelt appeal for national and political unity."

He warned that without the bailout deal, "the conditions for Greek citizens would become much more painful, in particular for the most vulnerable. The consequences would be impossible to foresee."

Assuming Papandreou's government does not fall, it is determined to hold the proposed referendum as soon as possible.

Greece's Foreign Minister Stavros Lambrinidis told CNN he was confident the Greek people would vote "yes" -- insisting his country is committed to Europe and the euro.

If the public does indeed back the plan -- which some may doubt after the angry anti-austerity protests seen in Athens -- then Papandreou could move forward with a strengthened mandate to carry out the tough reforms required by fellow European leaders and lenders.

But a "no" vote in the referendum could theoretically force Greece to crash out of the euro, the common currency for 17 European nations, and send shock waves through the global financial system.

At stake is an agreement for private lenders to scrap half of Greece's debt, worth 100 billion euros to Athens, and a promise of 30 billion euros from the public sector to help pay off some of the remaining debts. That makes the whole deal worth 130 billion euros ($178 billion).

Papandreou has come under fire from many sides since he suddenly announced the referendum Monday, only days after agreeing the deal in Brussels.

But Vanessa Rossi, an economics adviser to Oxford Analytica, a U.K.-based global analysis firm, said that frustrating though it was for Europe's leaders, Papandreou's move was "almost inevitable given that the Greek population has continued to protest heavily against the plans agreed in Brussels."

However, she believes the move is badly timed and that Papandreou should have made sure he had public support for the package before he went to Brussels.

Going to a referendum is "very much brinkmanship" on the prime minister's part, but he may believe he can win the vote, Rossi added.

The result of the referendum is likely to hinge on the voice of the "silent majority" -- and it is not clear what they are thinking, she said.

Neil K. Shenai, a doctoral candidate in International Political Economy at SAIS in Washington, said Papandreou faces an uphill battle if he wants to win the referendum.

The prime minister has not done enough to sell the bailout deal to the Greek people, Shenai said, and still needs to convince them that it's in their interests and not just those of Europe.

"It's never popular to kick people off the government payroll, it's never popular to raise taxes, but the bargain is, you put up with this short-term pain in exchange for what will hopefully be financial stability down the road," he said. "That's a tough sell in this economy."

So what would happen if the referendum results in a resounding "no"?

Rossi said it would be bad news for Greece -- but that Europe would not be staring over a precipice, because of the increase in the European bailout fund also agreed last week.

"It's disappointing for the rest of Europe to see but it's not going to be a 'make or break' point for the rest of the euro zone -- it's a make-or-break point for Greece," she said of the referendum call.

"For Greece, I really fear that people have not examined the full consequences of a default."

Such consequences include the government being unable to get access to funding and so being unable to pay its daily bills or wages to public sector workers, resulting in further fiscal austerity.

It is likely that the domestic economy would suffer a 20% to 30% collapse in such a scenario, Rossi said, and recovery would be incredibly difficult, with "no magic solution."

Peter Morici, professor at the Smith School of Business at the University of Maryland, in College Park, Maryland, disagrees.

He said it is wrong to think that the Greek people face only a choice between accepting the bailout or a far worse fate.

He considers the package unsustainable and that even if the Greek people back it, in a year's time they will be back at a point of crisis, asking when the austerity measures will end.

Greece would do better to revert to the drachma, the currency it gave up to join the euro zone in 2000, he said, than to pin its hopes on the referendum.

But Yannos Papantoniou, the former finance minister who took Greece into the euro, told CNN that he did not believe the referendum would ever be held, as it would not gain the necessary two-thirds support in parliament.

And while the possibility of Greece leaving the euro zone could not be excluded, he said, "the point is not to arrive at this stage, and the way not to arrive at this stage is to have a strong and effective government."

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