Few people expected Europe's sovereign debt crisis to be permanently solved by last week's summit. But few people expected that this is what the next problem might look like. Greek Prime Minister Papandreou has called a referendum on the bailout for January. If it fails, we're back to the starting gate. Actually, we'll be way behind the starting gate -- a lot worse off than if the crisis were addressed and solved a year ago.

Tyler Cowen doesn't think that it'll even get held -- that the deal will fall apart beforehand. Even if it passes there will be lots of uncertainty and guessing between now and then. And that uncertainty will lead to more pressure on Italy and Spain. A selection of reactions this morning:


Peter Boockvar:

The decision by Greek PM Papandreou to hold a referendum on the European plan to Save Greece is basically a call to the Greeks of whether they want in or out of the euro more than a vote on the latest bailout plan. The Greeks don’t want more austerity but they want to stay in the euro and that’s why the referendum will likely get a yes vote but we unfortunately have to wait until January for this. A no vote will lead to a collapse of the bailout, a hard default and a complete mess for everyone else. French bank stocks in particular are down 10-15% in response.

Krugman:

Things are falling apart in Europe; the center is not holding. Papandreou is going to hold a referendum; the vote will be no. Italian 10-years at 6.29 at pixel time; that’s a level at which the cost of rolling over the existing debt will force a default, even though Italy has a primary surplus. And with everyone simultaneously pushing for fiscal austerity, a recession seems almost certain, aggravating all of the continent’s problems.

Tyler Cowen:

Make no mistake about it, the decision to hold a “referendum” is a decision to turn down the deal altogether. The referendum will never be held. It is scheduled for January and the current deal, which is not even a worked out deal, won’t be on the table by then. It’s already not on the table. The opposition leader is already opposed to the referendum, there are months more of market volatility to come, the other EU powers will get skittish about the deal, how is the conscientious Slovakia supposed to feel, and how many other factors do I need to cite? And how can the Greeks decide how the referendum will be worded?

This is a way to back out of everything, under the guise of “democracy” and ex post blame the speculators and the rest of Europe.