It took only a few words from Greece's prime minister to upend Europe's efforts to convince the world that its grand plan to save the euro would mark a turning point in the continent's debt crisis and keep it from hurting the global economy.
The chaos generated by George Papandreou's mere proposal to put Greece's participation in the deal to a referendum exposed the fragility of the European plan and the lack of confidence it enjoys in markets.
Why did news of plans for the Greek referendum spook the markets so much?
If Greek voters reject the EU rescue package, which would require more austerity measures, Europe could face a potentially devastating Greek default on its debt. Banks would be stuck with huge losses on their government bond holdings. Fears that the debt deal will collapse or fall short led to deeper selling since late last week. The Greek referendum heightens those doubts.
What are the ripple effects for the U.S. economy?
Even without more chaos, some economists think Europe will slip into a mild recession late this year or early next. The weakness has already caused pain across the Atlantic, with the debt crisis shaking the confidence of those whose spending fuels growth. Jeff Fettig, CEO of U.S. appliance maker Whirlpool, said Friday that demand is tumbling in parts of Europe. Whirlpool cut its earnings estimates and said it would lay off 5,000 in North America and Europe. The United States exported $240 billion in goods to the European Union last year — more than twice its export total to China.
What could happen if the Greek government collapses? Could Greece leave the European Union and restore the drachma?
Analysts struggled to make sense of what a Greek government collapse, new elections or even a new national unity government might mean. The legal mechanism for the exit of Greece from the EU is murky. No member ever has left the EU.
If Greece defaults, its banks will likely collapse because they hold large amounts of government bonds. They would probably need to be taken over by the government. Unable to borrow, Greece would have to immediately balance its budget by making even more drastic cuts.
At that point it might face a decision to leave the euro, which would let it devalue a reinstated drachma, Greece's original currency, by some 50 percent and improve export competitiveness.
Does the U.S. have any role in heading off the crisis?
The surprise prospect of a Greek referendum on a European rescue plan illustrates President Barack Obama's limited ability to push for a swift resolution to a eurozone crisis. Europe's troubles will be the urgent topic at the Group of 20 summit, which convenes Thursday in Cannes, France. Much of the summit's attention will be placed on German Chancellor Angela Merkel and French President Nicolas Sarkozy. Obama administration officials are playing down any financial role for the United States in helping eurozone leaders create a firewall that would stop Greece's crisis from spreading. However, they noted that the International Monetary Fund, with U.S. financial assistance, could be called on.
Information from McClatchy Newspapers was used in this report.