The Greek economy and society have been unraveling for well over three years now under the weight of the Great Recession, a trade deficit they cannot fix because they no longer have a currency to devalue, and most visibly because of the draconian austerity programs that have been forced upon them by their “rescuers” running the EU. Now, it appears, the plans of the Greek and European political elites are unraveling as well. This could well be the tipping point in Europe. Prime Minister Papandreou has surprised everyone by calling for a referendum on the latest austerity package.

If there is a referendum and the austerity package is rejected the chances of imposing austerity packages on Portugal, Ireland, Spain, and most crucially on Italy will be greatly diminished. Once citizens in one of the PIGS have said “no,” the likelihood that citizens in other PIGS will also say “no” goes up. That could be the end of the “austerity followed by more austerity” strategy the European Central Bank (ECB) and European Commission (EC) have been pursuing from the get-go in one country after another.  It will also mean a “messy” default and probable exit from the euro for Greece. That is not going to be pleasant for Greeks. They would have been far better off with an orderly default and exit two years ago. Had they done what Argentina finally did back in 2001 when the EU first refused to protect them from the bond vigilantes and give them a way to grow out of their problems they would now be on the road to recovery.

If the members of PASOK who are outraged that Papandreou issued a surprise call for a referendum and the right wing political opposition conspire to topple Papandreou’s government and quickly elect a new government which refuses to hold a referendum, the street heat in Greece will intensify. Now that someone has raised the alternative of a democratic referendum instead of negotiated concessions by Greek ruling elites it will be much harder to defend rule by elite in Greece. In effect Papandreou has called the right wing opposition’s bluff. They have opportunistically opposed the austerity measures that Papandreou has succumbed to, saying they would insist on renegotiations and better terms. I seriously doubt this was ever true. But as a new government, in the present crisis, they are very unlikely to get significant concessions from the ECB, EC, and IMF. The truth is time has run out for negotiations, so any new government they head isn’t going to get a better deal. That will leave them to either take responsibility for caving or take responsibility for the disorderly exit. (It looks like Papandreou knew how to pay back his political enemies, even if he did not know how to respond to the crisis himself!) This will also prompt a serious reconsideration of strategy on the part of the European elite.

I don’t see a way out of this for the European elite. Plan A has finally come up empty. Plan A was always a disaster for the citizens of all the PIGS, and consequently a poor bet to save the euro and the European Union. But now it has proven to be a disaster on its own terms as well. A Greek Prime Minister just blew it to pieces with a surprise call for a referendum. It will be interesting to see what the European ruling elite come up with as their Plan B.