Greece threatened with Eurozone expulsion

An EU and a Greek flag are for sale as tourists walk in Plaka district of central Athens on Wednesday, Nov. 2, 2011. AP Photo

CANNES, France - European leaders drew a line in the sand for Greece on Wednesday, saying its referendum on a hard-won bailout deal will decide whether it stays in the eurozone — and vowing Athens will not get new aid until the result is in.

The acknowledgment that the vote — which will likely take place on Dec. 4 — could see Greece leaving the currency union is the first official admission that such an exit is possible and follows almost two years of pledges to the contrary.

The move to tie the vote to the fate of the euro is a huge gamble that could endanger the future of the currency union, the centerpiece of Europe's postwar unity, and potentially push the world economy into another recession.

"The referendum ... in essence is about nothing else but the question, does Greece want to stay in the eurozone, yes or no?" German Chancellor Angela Merkel said at a news conference together with French President Nicolas Sarkozy.

The leaders of the two biggest eurozone economies spoke to the press after emergency talks with Greek Prime Minister George Papandreou in Cannes, France. The discussion also included International Monetary Fund head Christine Lagarde and other top EU and eurozone officials.

By turning the referendum into a popular vote on whether Greece wants to remain in the eurozone — the currency union that gave it access to the club of Europe's richest countries but also allowed it to pile up a massive debt mountain — leaders are taking a risky bet.

The exit of the eurozone's weakest member could trigger a dangerous domino effect that could quickly see Ireland and Portugal, the other two countries that have received bailouts, also leave the currency bloc and cause the financial collapse of Italy and Spain, which are barely hanging on.

Papandreou said that he was forced to call a referendum after it became clear that there was no "broad support" from opposition parties for a bailout deal reached with the rest of the eurozone and big banks just a week ago.

That deal would supply Greece with an extra euro100 billion ($138 billion) in rescue loans from the rest of the eurozone and the IMF — on top of the euro110 billion it was granted a year ago — and would see banks forgive Athens 50 percent of the money it still owes them.

However, in return Greece had to accept another painful round of austerity measures and privatizations — harboring years of more pain for a people already reeling from two years of deep cuts.

"I felt that it was important that the Greek people make a decision on these important developments," Papandreou said. "It is their democratic right and the Greek people, I believe, are mature and wise to make the decision that is to the benefit of the Greek people and the country."

The alternative to the new rescue deal would be a hard default by Greece within days after the referendum, potentially toppling banks across Europe and further undermining an already slowing economic recovery.

Europe's increasingly shaky condition is the center of attention at a summit of the Group of 20 leading world economies in Cannes on Thursday and Friday. The United States, China and other nations are looking to Europe to get its house in order and avoid harming the global recovery. The United States has an important role to play but it is ultimately Europe's problem to solve, the White House said Wednesday as President Barack Obama headed for Cannes.

Merkel and Sarkozy said that a crucial euro8 billion ($11 billion) loan installment to Greece that was due to be paid out by mid-November won't be transferred until after the vote.

Eurozone finance ministers had already signed off on their part of the payment two weeks ago, but leaders said that without the second bailout assured there was no point in carrying on with the first one.

(At left, watch Mark Philips report on how Greece is jeopardizing the world economy.)

"We want to continue with the Greeks but there are rules and it's unacceptable that these rules are not followed," Sarkozy told journalists.

Papandreou said that Greece would be able to stay afloat until after the referendum — Greek officials had previously said that Athens would run out of money by mid-November — but acknowledged that the schedule was tight.

"If everything goes well — which we hope everything will go well in the referendum — it's quite a few days before the 6th tranche is needed to pay up salaries and pensions and so on," he said on his way out of the meeting.

While eurozone leaders tried to display a concerted front, with Merkel and Sarkozy briefing the press in their now habitual tandem, the referendum is uncovering growing cracks in the eurozone's unity.

"This did not happen in a coordinated fashion," she said of Papandreou's sudden decision to call a vote on the bailout deal. Merkel said that because of the referendum, the rest of the currency union now had to build up its defenses more quickly.

To make progress in that direction the finance ministers of France and Germany will meet with the EU's Monetary Affairs Commissioner Olli Rehn Thursday to work on a plan to boost the firepower of the region's bailout fund to euro1 trillion ($1.4 trillion).

That was one of the commitments of last week's eurozone summit, but investors remained unconvinced by the promise of a larger rescue fund as many questions on how it will work were left unanswered.

In Rome on Wednesday, Italy's Cabinet proposed legislation to sell off government-owned real estate, encourage investment in infrastructure and privatize local public companies in a bid to avoid becoming the next victim of Europe's debt crisis.

While Merkel and Sarkozy both stressed the democratic right of the Greek people to decide its own destiny, Jean-Claude Juncker, the prime minister of Luxembourg and chairman of the Eurogroup, was more direct.

"Greece had 8 billion — Greece has lost 8 billion after having made a decision to put all these questions to a referendum," he told journalists. "That's a pity."

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