Eurodoom

Economist
November 1, 2011

I suppose it's worth mentioning that Europe is back to crumbling before our very eyes. Late yesterday, the prime minister of Greece announced a plan to hold a referendum on the newly negotiated rescue deal. I'll let Roberto Perli, from the International Strategy and Investment Group, explain the political dynamics:

Papandreou’s motives are understandable: So far the opposition has provided no support for the measures that he has been forced to push through, and he and his party have been left alone facing the public anger. The opposition’s tactics are in a sense similar to those used by the Portuguese opposition earlier this year. There the opposition forced the government to fall, took over power, and promptly implemented policies very similar to what the previous government was going to do anyway. Papandreou knows that story, and his decision can be interpreted as a refusal to be the victim of the same game.

The hope is that the opposition, recognising that there is little choice but to implement agreed upon policies and understanding that the public is likely to reject the deal, will be forced to support the government's austerity measures, thereby making the referendum unnecessary. In the meantime, the news has thrown markets into a near-panic. European equities are plunging; the main Italian index is off over 6%. The euro is dropping like a rock. And sovereign spreads are blowing out. The yield on 2-year Italian debt is now over 5%. Bank shares are tumbling. It's hard to believe that just a few trading days ago markets were ebullient on news of the euro agreement.

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