This is a re-write of the original article published yesterday morning, arguing that a Greek referendum is an excellent idea.

George Papandreou’s decision to dismiss and replace all the heads of his armed forces and call for a referendum on whether Greece should accept the terms of the 26 October Euro agreement caused consternation all round. If you can tell the quality of a decision from a) the line up of those who oppose it and b) the nature of their expletives as they are lost for argument – “crazy”, “irresponsible”, “ridiculous” being the most mild - then it is clear that this was an excellent and welcome decision. 

There was for a moment a breath of democracy in the crisis of the European currency and an attempt at honesty. The Prime Minister’s office has issued a defence of the referendum which will get little coverage and which I reproduce in a box at the end of this piece – it links his stand with the popular movement “from Wall Street to Damascus”.

The question when I first wrote was whether members of the Greek establishment, supported by opponents of democracy in Paris and Brussels especially, would permit a referendum. The well-connected Helena Smith of the Guardian reported an aide of Papandreou: 

The referendum is a declaration of war against all those who have made Faustian bargains, all the special interests killing Greece. It is the beginning of a cathartic process that is going to see a lot of corruption and wrongdoing aired. That is why George is certain that rational Greeks will vote in favour at the end of the day. 

They were not allowed to. A ferocious response from European leaders squashed the idea. According to the BBC, after "Mr Papandreou told reporters in Cannes his referendum would in effect be a vote on whether Greece should remain in the euro...  the European Commission said if Greece left the European single currency, it would have to leave the European Union as well: "The treaty doesn't foresee an exit from the eurozone without exiting the EU," spokeswoman Karolina Kottova told a briefing in Brussels.

Since when was it that you could be in the EU like Denmark or the UK and not in the Euro but that if you left the Euro you would have to exit the EU as well? This was heavy duty blackmail.

Papandreou's old enemy and for a while his collaborator in negotiating the bail out, Evangelos Venizelos, declared there could be no referendum, "Greece's position within the euro area is a historic conquest of the country that cannot be put in doubt. This acquis by the Greek people cannot depend on a referendum". But at the same time back in the Cannes summit of the G20 he and his Prime Minister had just left, the European leaders were saying Greece might well leave the Euro -  now they had secured the fact that there would no longer be any risk of a democratic rejection. Instead, they sat on the Greek opposition leader Antonis Samaras and forced him to stand on his head as well, to say that he would support the October 26 package he had been denouncing all along.

Without a party majority to impose a referendum and clutching at the straw of a national government to secure support for the bail out, Papandreou had to concede there would be no referendum. It is hard to see how he can survive and I think it is a pity that he is trying to, rather than sticking to the need to consult the people and make the judgement theirs.

I have known and admired George Papandreou since interviewing him in 2005 and attending his ‘Symi seminars’ since. He is intelligent, thoughtful and not corrupt. Far from merely continuing the Papandreou dynasty as many allege (his grandfather and father were both prime minister) he is motivated by desire to undo the populism of his father, to make Greece an honest country. His argument, as someone who sees himself as a socialist, is that without an open, transparent government based on popular deliberation rather than prejudice, you can’t even start to have a progressive government: corruption and vested interests favour the powerful and hurt the poor. 

When he won power in 2009, alongside Mary Kaldor, another Symi veteran, I welcomed what Papandreou hoped to achieve. We wrote,

Greece’s deep-rooted corruption, clientelism and a huge budget overhang may cripple the incoming government and prevent it from delivering its remarkable reform programme. But Papandreou is an exceptionally original and open-minded politician, wishing to lead both Greece and PASOK towards a genuinely far-sighted response to the financial and environmental crisis and the international challenges facing Europe.

The overhang kept on being exposed as ever larger than at first reported and the debt crisis was insuperable. The first round of cuts and reforms aimed at achieving more self-government and democracy, despite the supremacy of the European financial system, and they were accepted by the country. But after the measures failed to address the deficit, the second round in July this year was not convincing. I was in Greece at the time and listened to the many arguments over the need to negotiate a deal that Greece might actually be able to deliver. But three things were clear: first, Papandreou had lost the support of the people; second, it was more about saving the banks in France and Germany than saving Greece; third, the Greek political elite (from the police commanders to MPs who voted to protect from prosecution fellow members who were clearly corrupt) was simply refusing to change – and if they wouldn’t why should anyone else? 

Greece really is between a rock and a hard place. From afar, the obvious course of action is a massive default of Argentinean proportions while leaving the Euro so that a devalued currency can give a country with immense potential the chance to grow. All talk about the dangers this poses to the wider banking system has lost its legitimacy. It was one thing to act ‘responsibly’ when understanding of the consequences was unclear. But they have been clear for two years now. If the EU leaders wanted to protect the European banking system then they needed to take this responsibility on themselves, not use Greece to shore it up. 

However, Papandreou and many who do not support him personally, feel leaving the Euro would be a disaster. Currently, polls show 70 per cent of Greeks wanting to stay, while at the same time a majority do not want to accept the 26 October package. In effect, they want it both ways: something European political leaders culpably paved the way for by wanting to have things both ways themselves when, as Jean-Claude Trichet, who has just retired from running the European Central Bank, put it, both the market and EU governments treated Greece to the knowing permissiveness of "benign neglect" all along. 

Why do so many Greeks want to stay in the eurozone?

But why do so many Greeks want to stay in despite the painful costs? In part because they fear that without the discipline of the Euro and being fully part of the EU itself, Greece will become a Balkan kleptocracy unable to throw off the corrupt bandits and tax farmers who have gained control over its state machine across the past decades and are still clinging on. 

If Greece was like Iceland, its administration would be mainly honest and capable. It could leave the euro, default and start to gain the gains, as Nick Pearce has implicitly observed. But it is not like Iceland, it fears losing the discipline and international safety of being in the Euro. This is why Papandreou and others insist on the need to stay in – they are fighting an internal battle against the dark forces of the Greek system. 

It is hard for outsiders to realise how embedded they are. There isn’t a tax raising revenue system in Greece so much as tax farming, with inspectors selling on their positions, refusing to sign off honest returns without a bribe and themselves failing to file tax returns. A proposed wealth tax is supposed to be levied via electricity bills to ensure it is paid. Open corruption by MPs such as those opposed to the “reckless” referendum mean regular people understandably refuse to pay their tax.  

Of course, there remain very understandable reasons for rejecting the 26 October package. According to the New York Times, Akis Tsirogiannis who recently lost his job at a furniture workshop, believes, "This deal, like all the others, is a life sentence of austerity for Greeks. We need to reclaim our country." The Guardian has just carried a vivid report of people taking their lives into their own hands

Papandreou supporters see remaining in the Euro – and paying the price - as the only means whereby Greece can reclaim itself: “We are proud of being in the Euro and deserve to be part of the Eurozone but it is crucial to show that we can live up to our obligations as members of it” (is a rough summary of what the Greek Prime Minister said here).

It became clear to him that he could not deliver on the 26 October terms in the present domestic climate. Only by presenting the choice he made to the voters Papandreou argued could the country hope to see the agreement carried through, cleaning out the old political class in the process.  Furthermore, while Sarkozy lectures the Greeks on the need to stick to their word, the agreement itself is being unpicked in the small print by a bankers alliance, as Robert Kuttner explains in the American Prospect. In Kuttner's words, Papandreou’s referendum was a way of telling the EU, “if you want the Greeks to continue the belt-tightening, you cannot alter the terms of the deal by stealth”. 

To put it another way, it is not Papandreou who put the 26 October agreement at risk: he is trying to save it. But the architects of the Euro, the most undemocratic and elitist of projects, would not even contemplate being saved by what they scorn…  democracy. This is why an unholy alliance within and outwith Greece gathered its forces to stop a referendum.

 Papandreou's office issued this defence of the referendum:

• This is a historic moment for Greece. The magnitude of the task ahead calls for national unity. We are calling on the Greek people to stand up and take responsibility for their own future.
• Our success in overcoming the Greek crisis depends on solidarity. Solidarity among EU partners, but also among the Greek people. Unless the Greek people stand united behind this new deal, it will fail. 
• We are not afraid of direct democracy. Decisions taken behind closed doors must be put to public scrutiny – especially when they have such a deep impact on people’s everyday lives and livelihoods. A referendum will give our decisions democratic legitimacy and ensure that reforms are implemented on time and on target. 
• Our aim is to create the space for a balanced public debate, above and beyond party lines, so that our citizens can make an informed and responsible decision about their country’s future. People must understand the repercussions of their decision and the implications of the alternatives. 
• Partisan politics and populist posturing have complicated the reform process. A referendum forces the entire spectrum of critics and stakeholders – from the far left to the far right – to sit down at the same table and address the fundamental problems in Greece head on in a responsible manner. 
• We are working hard to restore trust in our state institutions. First, we must show that we trust our citizens. That we want their full participation as we work together to rebuild and reform Greece.
• All over the world, from Wall St to Damascus, people are protesting about the lack of democratic legitimacy. Even in advanced democracies, people feel that governments are unaccountable and too easily swayed by vested interests. Holding a referendum is an important step to strengthen democracy in Greece and give power back to the people.