Greece has tentatively agreed to shelve a controversial plan for to hold a referendum on whether to accept the latest financial bailout, after pressure from European leaders at the G20 summit in Cannes. Meanwhile, countries at the summit have discussed ways to boost the global economy, including strengthening the IMF.
No Greek Referendum?
Greek Prime Minister George Papandreou suggested the referendum this week to legitimise the drastic austerity policies intended to curb Greece's debts. But there were fears Greek voters might instead reject the bailout because they do not want more austerity measures, which have lead to economic and social hardship in the country.
On Thursday, Mr. Papandreou apparently caved in to pressure to call off the vote. However the Economist magazine has pointed out that though Mr. Papandreou has been reported as dropping the idea of the referendum, on Thursday he still spent much of a rambling speech to his parliament justifying it.
Amid mounting panic in Greece that the country could be thrown out of the European currency and into bankruptcy, the conservative opposition also agreed to support Europe's latest bailout deal.
The opposition had previously rejected the austerity measures that a bailout would require, instead calling for pro-growth policies based on tax cuts. But opponents of the bailout fear national bankruptcy and a Greek exit from the euro even more.
Earlier this week, European leaders suggested that Greece would have to leave the euro if it rejected the bailout and went into default.
The increasingly open debate in Europe's capitals about whether Greece should be kicked out of the euro has mortified the Mediterranean nation. Being cast out of the euro, centrepiece of 60 years of European unification would also be a huge blow to the morale and identity of a nation that sees itself as the cradle of European civilization.
Despite his U-turn on the referendum, Mr. Papandreou is still fighting to stay in power. His government faces a vote of confidence in parliament on Friday. Mr. Papandreou has refused to voluntarily step down. Analysts say regardless of whether he wins or loses the confidence vote, early elections are increasingly likely in Greece.
Report: Greece Blinks on Euro Threat [Wall Street Journal, 3 Nov 2011]
Analysis: The burning fuse [The Economist, 4 Nov 2011]
What if Greece Leaves the Euro?
According to a BBC editorial, the Greek reversal means Mr. Papandreou has felt the heat from Europe's most powerful players and realised that he cannot take it.
Speaking to his party on Thursday evening, the Greek leader said he had been told during talks in Cannes on the sidelines of the G20 summit that not only would a "no" in a referendum mean leaving the euro, but the question of rejoining would be off the agenda for at least a decade.
Analysis: Papandreou blinks first in euro poker game [BBC, 3 Nov 2011]
Many economists believe that reintroducing a weak national currency would destroy Greece's banking system and cause widespread financial ruin in its society. But other analysts, and the Greek people who oppose the bailout and its austerity measures, think leaving the euro is the best way to get Greece out of its mess.
If Greece returns to its own currency, the drachma, the new currency would fall and inflation would rise rapidly. Living standards would be hit hard, and the short term costs would be massive. Greece would probably have to impose capital controls to prevent all the money leaving, much as Malaysia did in 1998 after the Asian financial crisis.
Greece would have no buying power, everything would be extremely expensive and it would still be broke. But the idea is that, with its currency so weak, Greece's economy would grow rapidly.
Argentina is often used as a comparison of such an outcome, though Nobel-prize winning economist Paul Krugman has warned this is "an imperfect parallel". Argentina, which had its peso linked to the US dollar, defaulted on US$102 billion of debt in 2001-02. Argentina had to go through years of pain, and at least already had their own currency - they simply had to de-peg it from the dollar. Greece has to start afresh.
However, there are at present no mechanisms for a country to leave the euro without also leaving the European Union. The scenario was never envisaged by the optimistic officials who signed the Maastricht treaty from 1992, which led to the creation of the euro, and its successor, the Lisbon treaty in 2007.
That said, leaving the EU may not be the end of the world. Iceland, Liechtenstein and Norway are not part of the EU, but are part of the European Economic Area, meaning they get access to the single market. Switzerland is not even a member of the single market, and it trades with the EU with few problems.
But a Greek departure would set an unfortunate precedent, a blow to the EU's prestige and stability.
Analysis: How might Greece leave the euro? [BBC, 3 Nov 2011]
Meanwhile, leaders of the Group of 20 industrial and developing nations, meeting in Cannes, France, have debated further measures to shore up the wider euro currency zone against financial chaos.
The United States has led international pressure on the European Central Bank to take bolder action to resolve the crisis, which is threatening to undermine global economic confidence. The ECB cut its key interest interest rate to 1.25% from 1.5% on Thursday, a move aimed at helping Europe's economy cope with impending recession. But the bank has rejected calls to act as a lender of last resort to European governments and insisted that ECB bond purchases would remain limited.
However, reports say the G20 leaders have agreed to increase the firepower of the International Monetary Fund. Media reports say that according to a draft communiqué that may be issued at the end of the summit, countries will be allowed to make voluntary contributions to boost the war chest of the IMF, the world's lender of last resort.
"There is a broad view among G20 there does need to be additional financing," said Australian Prime Minister Julia Gillard. "We will be working on it overnight and tomorrow."
However, a White House spokesman said that the US would not be providing additional funds.
The IMF has played a key role in the Eurozone crisis, providing additional money to Greece, Portugal and the Irish Republic alongside the bailout loans from other Eurozone and EU governments.
French President Nicolas Sarkozy also said that countries running large trade surpluses - which include China and Japan - were willing to do more to help boost global growth. The draft communiqué referred to actions by these countries to boost their spending.
However, it left open whether the big Asian exporters would allow their currencies to strengthen - something that would hurt their trade competitiveness.
Chinese President Hu Jintao also played down the chance of allowing the value of the yuan to rise, contradicting more optimistic remarks by the US. The value of China's currency has been a controversial topic between both countries in recent weeks. Last month the US Senate voted in support of legislation aimed at pressuring China on its currency, though House Speaker John Boehner has thus far refused to let the bill go to vote in the upper chamber of the US Congress.
Report: G20 to look past Greece with pledges, euro firewall [Reuters, 4 Nov 2011]
Report: G20 'agrees to boost' International Monetary Fund [BBC, 4 Nov 2011]