Greece: Germany's Merkel suggests euro referendum

Germany's chancellor apparently waded into Greece's choppy political waters on Friday, when Athens said Angela Merkel suggested that the country should hold a referendum on the euro together with next month's national elections.

Berlin first refused to comment and then denied that Merkel had floated the idea during a phone conversation with Greek President Karolos Papoulias. The alleged proposal ruffled feathers across Greece's deeply fragmented political spectrum, with parties saying it was an unwarranted intervention in domestic affairs at a particularly sensitive time.

Merkel's comments were first referred to by Greek government spokesman Dimitris Tsiodras, who said in a statement: "(Merkel) also conveyed to the President thoughts on holding a referendum along with the elections, with the question of to what extent Greek citizens wish to remain in the eurozone."

Crisis-afflicted Greece is set to hold elections on June 17 to end a political deadlock after a previous vote on May 6 produced a hung Parliament, with the country's future in the eurozone potentially at stake.

Edgy markets and analysts fear a victory by parties opposed to austerity commitments could spur bailout creditors to stop the flow of rescue loans. Many argue that this would cause such widespread misery that Greece would ultimately have to abandon the 17-member currency union, jolting the global economy.

Tsiodras said a referendum was "obviously" out of the question, as it falls outside the jurisdiction of Greece's newly-appointed caretaker government.

But a German government spokeswoman said reports on the alleged referendum proposal "are inaccurate." She said the conversation between Merkel and Papoulias — a fluent German speaker — was confidential.

The spokeswoman, who spoke late Friday after consulting with the Chancellor's office, cannot be named in line with government policy.

Relations between the two countries have been turbulent over the two and a half years of Greece's acute financial crisis, which led to Athens being kept solvent by international rescue loans since May 2010.

Germany is a staunch advocate of the hugely unpopular austerity measures Greece adopted to secure the loans — to which Berlin is a major contributor.

Conservative leader Antonis Samaras, whose pro-bailout New Democracy party won a Pyrrhic victory in the May 6 vote, said Merkel's reported suggestion was "at the very least unfortunate."

"Greece doesn't need a referendum to prove its choice in favor of the euro, a choice that it's defending with bloody sacrifices," he said. "But the Greek people deserve the respect of their European partners."

Syriza Radical Left Coalition leader Alexis Tsipras — who led his anti-bailout party to a surprise second place in the last election — said Merkel was treating Greece "as a protectorate."

A presidential decree is expected Saturday to formally dissolve the short-lived Parliament elected on May 6 — which held its second and last session Friday — and call elections.

Until June 17, senior judge Panayiotis Pikrammenos is heading a caretaker government with no authority to make binding decisions. So in coming weeks all eyes will be on Germany and other European leaders for signs that they will prove flexible in their demands for new austerity measures next month and, more broadly, in Greece's bailout terms.

While Merkel has hinted that European economic policies could be supplemented with more growth-oriented measures, she has not signaled any willingness to significantly ease Athens' austerity plan.

Greek voters angry at the repeated income cuts and tax hikes, which locked the country in a deep recession and bumped unemployment to a record high, deserted mainstream pro-austerity parties in the May 6 vote. The electorate shifted to a bevy of parties from the Stalinist left to the quasi-Neo-Nazi right, which promised an end to the pain. At the same time, most of the austerity-bashers insist that they want to keep Greece in the euro.

The two seem irreconcilable.

Fitch ratings agency on Thursday to downgrade Greece to CCC, the lowest possible grade for a country that is not in default, warning of a "probable" Greek exit from the euro currency union if next month's poll results in an anti-bailout government. On Friday, Fitch also downgraded five Greek banks — National Bank of Greece, Eurobank, Alpha, Piraeus and Agricultural Bank of Greece to CCC.

Opinion polls suggest the election will be a closely contested affair between Syriza and the two mainstream parties — New Democracy and Socialist PASOK — that alternated in power for the past four decades and which have lost more than half their support.

JP Morgan Chase Bank analyst David Mackie raised the likelihood of a Greek euro exit from 20 percent to 50 percent if Syriza wins the elections and rejects the austerity measures outright.

Mackie said a Greek eurozone exit would see the country's gross domestic product shrink by as much as 25-30 percent.

In the streets of Athens, people expressed a mixture of apprehension over the future of the country and anger with politicians who let it come so far.

"For me, the political system needs to sit down and come to an understanding because they are killing our country, that is for sure," said Athens resident Georgia, who didn't give her last name. "If they don't do it, our country will be lost."


Juergen Baetz in Berlin and Menelaos Hadjicostis in Athens contributed