- Associated Press - Wednesday, November 2, 2011

CANNES, France — European leaders drew a line in the sand for Greece on Wednesday, saying its referendum on a hard-won bailout deal will decide whether it stays in the eurozone and vowing Athens will not get new aid until the result is in.

The acknowledgment that the vote which will likely be held Dec. 4 could see Greece leaving the currency union is the first official admission that such an exit is possible and follows almost two years of pledges to the contrary.

The move to tie the vote to the fate of the euro is a huge gamble that could endanger the future of the currency union, the centerpiece of Europe’s postwar unity, and potentially push the world economy into another recession.

“The referendum … in essence is about nothing else but the question, does Greece want to stay in the eurozone, yes or no?” German Chancellor Angela Merkel said at a press conference together with French President Nicolas Sarkozy.

The leaders of the two biggest eurozone economies spoke to the press after emergency talks with Greek Prime Minister George Papandreou in Cannes, France. The discussion included International Monetary Fund head Christine Lagarde and other top EU and eurozone officials.

By turning the referendum into a popular vote on whether Greece wants to remain in the eurozone, the currency union that gave it access to the club of Europe’s richest countries but also allowed it to pile up massive debt, leaders are taking a very risky bet.

The exit of the eurozone’s weakest member could trigger a dangerous domino effect that could quickly see Ireland and Portugal, the other two countries that have received bailouts, also leave the currency bloc and cause the financial collapse of Italy and Spain, which are barely hanging on.

Mr. Papandreou said that he was forced to call a referendum after it became clear there was no “broad support” from opposition parties for a bailout deal reached with the rest of the eurozone and big banks just a week ago.

That deal would supply Greece with an extra (euro) 100 billion ($138 billion) in rescue loans from the rest of the eurozone and the IMF on top of the (euro) 110 billion it was granted a year ago and would see banks forgive Athens 50 percent of the money it still owes them.

However, in return Greece had to accept another painful round of austerity measures and privatizations harboring years of more pain for a people already reeling from two years of deep cuts.

“I felt that it was important that the Greek people make a decision on these important developments,” Mr. Papandreou said. “It is their democratic right and the Greek people, I believe, are mature and wise to make the decision that is to the benefit of the Greek people and the country.”

The alternative to the new rescue deal would be a hard default by Greece within days after the referendum, potentially toppling banks across Europe and further undermining an already slowing economic recovery.

Europe’s increasingly shaky condition is the center of attention at a summit of the Group of 20 leading world economies in Cannes on Thursday and Friday. The United States, China and other nations are looking to Europe to get its house in order and avoid harming the global recovery.

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