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Why George Papandreou's Referendum Is Good for the European Crisis

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The Greek prime minister's surprise call for a referendum on the debt restructuring could be the first step on a path toward a real solution to the crisis.

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This is how big lies end: With the specter of rejection by 11 million bankrupt Greeks terrifying their creditors in charge of a 317-million-strong economic bloc.

Europe's pseudo-democrats are on the verge of a nervous breakdown over the possibility that their latest "rescue" plan -- which condemns Greeks to permanent austerity and a national yard sale for the benefit of French and German banks -- might be put to a popular vote in the cradle of democracy.

They're furious at Greek Prime Minister George Papandreou for daring to seek a national mandate for this ruinous course. After all, they're willing to take an effective 28% off Greece's mounting tab in exchange for new loans and further measures to deflate the Greek economy.

This was all worked out in Brussels last week according to a Franco-German script. Greece was to spend the next decade in debtor's prison, for the promised payoff of ending up no better off than Italy is now.

And then Papandreou ditched his lines and made like a latter-day Pericles. Now he's been summoned to Cannes by his European backers, who will not be awarding him the Palme d'Or, and perhaps not the already promised gold.

It was the action of a desperate and exhausted man, and it's entirely possible it was Papandreou's final act, should his government lose Friday's confidence vote. If so, new elections loom and then more haggling and ultimately an exit from the euro, because Greece can't survive in a currency union with Germany without turning into either a basket case or a German colony.

Whether Papandreou stays or goes, it's unlikely that any rescue plan can proceed without popular support, as demonstrated in a referendum or fresh national elections. Growing civil disobedience by disgruntled Greeks has made the country almost ungovernable, and calls to default and bring back the drachma are getting louder.

That's the rational course, even if it leads to riots and bank runs before the economy gets going manufacturing domestic substitutes for unaffordable imports. That's how Argentina got back on its feet. Brazil inflated its debts away. But that's not possible inside the eurozone.

The alternative, amazingly, is worse: A lost decade, solving few of Greece's problems.

In 2009, when the full extent of recent Greek profligacy came to light, the national debt stood at €262 billion and the economy was treading water. After two years of harsh austerity, the debt is up to €330 billion, while the economy is imploding by at least 7% annually.

No wonder the German "cure" is so unpopular. The surprise is that anyone expected the Greeks to get back up on the gurney.

The upside for investors is that Greece is rebelling against a plan that doesn't stand a chance of solving Europe's problems. Destroying Greece in order to save it has sent a terrible message to the holders of Italian and Spanish bonds. Were Europe to abandon austerity, buy such bonds in bulk, and make a genuine push for growth, things could get better in a hurry.

Maybe Papandreou deserves a prize.

Editor's Note: This article was written by Igor Greenwald of MoneyShow.

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