Gyrations on policy leave Greeks dizzy

Even Greeks themselves had trouble tracking everything that happened on a day of whipsaw political swings in their country.

Less than 24 hours earlier, they watched their prime minister stick up for their democratic right to a referendum before hostile European officials at a summit in France. But as soon as he returned home, George Papandreou called off his incendiary plan to let his people vote on Europe’s latest rescue strategy for their debt-racked nation.

One moment, the Greek leader commanded the “full backing” of his Cabinet; the next, he didn’t. He was stepping down, some said; he was staying on, others countered. And after hopes rose for a time that the nation’s two big parties would set aside their differences to form a unity government, they soon crashed amid a mushroom cloud of name-calling.

As a result, Greeks went to bed Thursday night numbed by their country’s nearly surreal instability that has also sent shock waves through the rest of the world, overshadowing a crucial gathering of global leaders on the French Riviera. The chaos has been especially acute in the Eurozone, the club of 17 nations that share the euro currency, now engulfed by a serious debt crisis.

Greece’s uncertainty is set to continue Friday, as Papandreou faces a crucial vote of confidence whose outcome remains too close to call. If he loses, his government will collapse, forcing snap elections and heightening fears of a messy default on the country’s mountain of debts.

Yet if he survives the vote, his hold on power is still far from assured. There were reports that, with his political capital exhausted, Papandreou would step down anyway to allow an interim government to guide Greece through the next few weeks, including ratification of a new bailout deal recently crafted in Brussels.

Already on shaky political ground, the American-born Papandreou, 59, deepened the turmoil earlier this week by calling for a referendum on that agreement, which entails enlarging Europe’s rescue fund and forgiving some of Athens’ debt.

Withdrawing the referendum may produce some immediate relief, but it’s unlikely to dispel volatility in the financial markets or resolve the galloping debt crisis.

Stock markets rose on speculation that the plebiscite would be scrapped. But more important, the uncertainty in Greece and the near-paralysis of Italy’s debt-burdened government pushed borrowing costs for Rome to painful levels Thursday, fueling fears that the euro debt crisis lies in danger of spinning out of control.

Details of the latest European bailout plan remain nebulous, unsettling investors, and the prospect that China and other emerging markets might pitch in to help bolster Europe’s rescue fund – which the Eurozone is counting on – is receding.

Papandreou’s call for a referendum came as a nasty surprise for other European leaders, who had thought their new plan a done deal. Summoned to a meeting Wednesday in Cannes, France, before many leading participants there for the G-20 summit, he was warned starkly that Greece could either choose to remain part of the Eurozone family or go it alone. He was also told that Athens’ next batch of emergency loans to stay afloat, worth $11 billion, would be suspended until the referendum was over.

The pressure appeared to work. Papandreou had gone to Cannes with what his spokesman described as the “full backing” of his Cabinet, but that support quickly began to unravel upon his return to Athens on Thursday, with some of his most senior colleagues rebelling and openly opposing the referendum.

“Greece’s position within the euro area is a historic conquest of the country that cannot be put in doubt,” Papandreou’s pugnacious finance minister, Evangelos Venizelos, said.

Backed into a corner, Papandreou went into an emergency Cabinet meeting with an offer to scrap the plebiscite, said Anna Diamantopoulou, the education minister.

He confirmed the embarrassing U-turn later in a speech to his fellow Socialist lawmakers, telling them that the referendum was no longer necessary because the opposition New Democracy party had agreed to support the bailout deal after initially balking.

“I applaud this different position adopted by the New Democracy party. Hopefully it can mark the start of a new political culture,” Papandreou said, adding that his bombshell move had “offered a positive and creative shock” to the debate. It also caused markets to tank and European officials to react with horror.

At home, Papandreou has presided over increasing unemployment, higher taxes, public-sector layoffs and a steadily shrinking economy, which have brought unrest, violence and the acrid smell of tear gas to the streets of Greece’s cities.

Plenty of Greeks continue to wonder whether their many sacrifices to join and remain in the Eurozone have been worth it. Many are hurting from some of the most brutal austerity measures the country has seen, ordered by international lenders as a condition of bailing Athens out.

“All the euro has brought us has been pain,” said retiree Angeliki Martaki in Athens. “At least with the drachma we were what we were: Greek. Now, I don’t know what we are and who is in charge of our national destiny.”

The tumult in the corridors of power remained unabated despite Papandreou’s decision to cancel the referendum. Feverish reports had the prime minister on his way to the Greek president’s office Thursday afternoon to tender his resignation, rumors that his aides worked hard to quash.

Later, confidants, including Diamantopoulou, said that Papandreou had acceded to an opposition request to form a unity government, which would entail his stepping down as premier and preparing for an early election once Parliament ratified Europe’s new bailout plan. Surveys have shown that many Greeks approve the idea of a national “salvation” government blending both sides of the aisle in Parliament to haul the country through the crisis.

In his speech to lawmakers from his ruling Socialist party, Papandreou invited New Democracy to the table as “co-negotiators” over the bailout plan. But he reiterated his belief that snap elections would be disastrous for a country in extremis.

That elicited a stunning backlash from New Democracy leader Antonis Samaras, Papandreou’s onetime roommate when the two were young men studying at Amherst College in Massachusetts.

“I never accepted a deal to co-govern,” a furious Samaras said in Parliament Thursday evening. “He’s lying, blackmailing and smearing the reputation of Greece abroad, all for the sake of clinging on to his chair. I told him, ‘You’re out, we form an interim government and we go to elections.’ He didn’t respond. I told him to resign....He didn’t. We should hold elections now, and let the people decide.”

Samaras and his followers then stalked out of the chamber.

There was hope later Thursday night that the two men might still speak by telephone and patch up their differences, to cap a day of white-knuckle political developments.

But the confidence vote Friday, scheduled for late in the evening, still rests on a knife’s edge. Papandreou’s majority is down to just one or two lawmakers in the fractious 300-member parliament, where anything seems possible.

“I’m confused. I don’t know whom to believe,” said Yannis Kapsis, a kiosk owner. “Everyone, it seems, has some motive, some agenda. I’m starting to feel ashamed of being Greek.”

henry.chu@latimes.com

Special correspondent Carassava reported from Athens and Times staff writer Chu from London.