They may have invented democracy but it’s causing a headache for everyone else. Greek Prime Minister’s George Papandreou vow to take the latest Eurozone debt plan to a referendum has thrown other European leaders and its markets into a panic.

“Citizens are the source of our strength and citizens will be called on to say ‘yes’ or ‘no’ to the agreement. It is not for others to decide but the Greek people to decide … we have faith in the people. We believe in democratic participation. We are not afraid of it,” declared Papandreou as he announced the referendum

“The people will be asked whether they want to adopt [the deal] or reject [the deal]. This vote of confidence will be a foundation stone on which we will build a new structure, a new Greece.”

On Friday the Greek parliament will have a vote of confidence for the leadership of Papandreou. The debt deal referendum will not occur until probably January.

A referendum throws into doubt negotiations that took months to finalise with Eurozone leaders. It’s not exactly surprising that the “home of democracy” would want to vote on the austerity measures. But democracy doesn’t mean you always like the outcome, says The Economist‘s Buttonwood notebook blog:

“If the Greeks designed their own menu, one would guess that it would be for the EU to lend them money, without imposing the austerity conditions. But the Germans have to satisfy their own voters; democracy cuts both ways.”

Giving Greeks the chance to vote helps make them accountable, notes Elena Becatoros in The Independent.

“The public vote would allow the Socialists — who have been vilified by an increasingly hostile public during months of strikes, sit-ins and violent protests over austerity measures — to pass the responsibility for the country’s fate onto the Greek people themselves.”

Why would the Greeks reject the EU plan? The Independent‘s Ben Chu offers a look at the details:

  • Public sector wages have been cut by 15%. An additional 20% cut is in the pipeline.
  • Wages of employees of state-owned enterprises have been cut by 30%. A further 20% cut is due in 2011-12.
  • Pensions in the public and private sector have been cut by 10%. An additional 4% reduction is coming.
  • 70% of public sector contract employees, around 85,000, have been made redundant.
  • Total public sector employment has been cut by 10%.”
  • Spending on pensions, illness and drugs has been reduced by EUR3.4bn, 1.5% of GDP.

Can Papandreou maintain his leadership? Things are looking shaky, writes George Gilson in Athens News, a Greek newspaper in English.

“At the same time, Papandreou’s sudden decision to replace the chairman of the joint chiefs of staff and the heads of all three branches of the military the day after the referendum announcement stirred another political uproar. Coming amidst a raging political crisis, the move was viewed as yet another sign of political panic and further undermined confidence in the government.”

The Eurozone deal had placated markets last week. This latest news isn’t helping, David Miller, a partner at Cheviot Asset Management, tells The Guardian:

“Papandreou’s strategy could well be to smoke out the opposition by winning the confidence vote on Friday, and then try and gain approval for the austerity plan by presenting it as the best of the two unpalatable options.

That said, at this time subtlety isn’t going to reassure the markets. Today’s market reaction was a clear sign that a disorderly Greek default has not been priced in and that the good will generated by last weeks announcement has evaporated.”