Greek Prime Minister George Papandreou seems willing to risk throwing Europe -- and by extension the global economy -- into chaos in an effort save face politically.

Already facing angry mobs protesting in the streets of Athens and besieged by critics from Greece’s opposition parties, Papandreou apparently wants to deflect blame away from himself for the next round of austerity measures mandated by the latest Greek bailout deal reached by European leaders last week.

“Papandreou is throwing in the towel and is looking for a graceful exit. By calling a vote, he wants the people to say that they don't want the euro rather than (saying it) himself,” said Axel Merk, president of Merk Investments and an expert on European fiscal policy.

Stock markets plunged Tuesday after Papandreou shocked other European leaders -- and many in his own country -- by announcing he would put the rescue proposal before Greek voters in a referendum. The Dow Jones Industrial average was down 280 points at midday as fears were once again revived that the European debt crisis could spread outside the continent. (The market rebounded somewhat around midday on talks that the referendum was not going to happen.)

It’s widely assumed that any further austerity measures required as terms of another Greek bailout would be rejected in a popular vote, regardless of how that  “no” vote impacted Greece’s economic future and its relations with the rest of Europe.

“The people will say 'no,'” Merk predicted. “What Papandreou’s asking is, ‘Do you guys want to suffer and make the tough choices?’ Of course the answer will be 'no.' Then the country will fall into anarchy and (Papandreou) will say it’s not my fault, it’s what the people wanted.”

The bailout agreement reached last week would slash 50% of Greece’s debt held by private investors, a move designed to solidify Europe’s banking system and prevent the continent’s debt woes from spreading.

Papandreou has thrown that agreement into doubt and almost single-handedly revived the issue of contagion.

“This move introduces a significant amount of additional uncertainty concerning both the fate of both Papandreou’s government and, most importantly, of the package of measures agreed by the Eurozone leaders less than a week ago,” said Wolfango Piccoli, an analyst with Eurasia Group.

What’s more, the entire spectacle casts doubt on European leaders’ ability to deal with the crisis, which will eventually drain investor confidence in the prospects for European businesses. All of which increases the likelihood of Europe slipping back into recession.    

“Indeed, even if the deal is finally approved in the referendum, uncertainty between now and the date of the vote will certainly take their toll on the Eurozone’s business and consumer confidence, increasing the probability of a recession,” said IHS Global Insight analysts Blanka Kolenikova and Diego Iscaro in a research note.

On the other hand, if the bailout is approved by voters Papandreou will in effect be getting permission from the public to put in place even more austerity programs in an effort to close Greece’s massive deficit and stave off default.

A ‘yes’ vote would also go a long way toward calming global markets in that it would eliminate much of the uncertainty hovering over Europe and raise optimism that the situation can be resolved.

But a ‘no’ vote is much more likely if the violent protests in Athens are any indication of public sentiment for future austerity programs. The Wall Street Journal reported that an opinion poll conducted in Greece since the bailout deal was announced revealed that nearly 60% of Greeks oppose the agreement.

Analysts believe a rejection of the bailout -- or some broader rejection of future cooperation with the European Union -- would lead to Greece being cut off by the EU, the International Monetary Fund and the European Central Bank, the three entities in charge of propping up Greece and staving off contagion.

If Greece is cut off, default is all but inevitable, and the likelihood of Greece leaving the EU altogether increases, as well.

Merk believes default was inevitable “from the get go,” and that if there’s a silver lining to Papandreou’s startling announcement is that it will force Europe to contain Greece once and for all, and begin addressing emerging debt issues in Italy and elsewhere.

“There was no solution on Greece last week,” he said. “The bank recapitalization program is the one thing that’s for real. That’s one thing that’s being taken seriously and being pursued.”

As part of broader measures to shore up Europe’s banking system, the agreement reached last week called for Europe’s largest banks to keep more cash on hand in case investments go sour and funds are needed to keep paying off debts.

In 2008, many banks found themselves unable to pay their debts when investments in bad real estate loans drained their cash reserves. When banks can’t pay their debts it freezes up the entire financial system. If Greece were unable to pay its debts, the fear is that it would set off a chain reaction that could bring the European banking system to a standstill.

But Merk said incremental steps aren’t working and Greece should probably just default, which would allow the rest of Europe to deal with the crisis in a more realistic way.

“We can finally move on,” said Merk. “We knew Greece was going to default all along. Maybe they stay in the euro, maybe they leave. Who cares? What’s important is dealing with the contagion.”

Follow Dunstan Prial on Twitter @DunstanPrial