By Noah Barkin
The summit on the French Riviera had been meant to focus on reforms of the global monetary system and steps to rein in speculative capital flows, but a shock decision by Greek Prime Minister George Papandreou Monday to call a referendum on a new EU/IMF aid package for his country has upended the talks.
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Papandreou was summoned to Cannes on the eve of the summit and given a stark warning by French President Nicolas Sarkozy and German Chancellor Angela Merkel, both clearly angered by his gambit, which has sent global stock markets and the euro currency spiraling lower.
They convinced the Greek prime minister to bring forward the referendum to early December and insisted it be focused on the broad issue of whether Greece wants to stay in the currency bloc, rather than limiting it to a vote on a new 130 billion euro ($179 billion) bailout package, which a strong majority of Greeks oppose.
They also made clear that Athens would not receive an 8 billion euro aid tranche it desperately needs to avoid default until the referendum had passed.
Should it fail, the EU/IMF aid would end, plunging Greece into a disorderly default that would reverberate across the 17-nation euro zone, engulfing big economies like Italy and Spain.
"Our Greek friends must decide whether they want to continue the journey with us," Sarkozy told reporters at a joint news conference with Merkel after the crisis talks.
The German chancellor, describing the discussions with Papandreou as "tough and hard," said the goal of stabilizing the euro was ultimately more important than saving Greece if it did not want to be saved.
A chastened Papandreou flew back to Athens with his finance minister shortly after the talks had ended. Before leaving he said the referendum could take place on December 4 and would be focused on "whether we want to remain in the euro zone."
That plan, which includes debt relief for Greece, a recapitalization of European banks and a leveraging of the bloc's rescue fund, the European Financial Stability Facility (EFSF), was meant to stem the two-year old crisis before Papandreou's referendum call sent the bloc into damage control mode.
"The referendum adds a further layer of complexity and uncertainty to an already complex crisis," said Domenico Lombardi, a former IMF executive board member who is now a senior fellow at the Brookings Institution in Washington.
"Most importantly, it starts off a political mechanism that could eventually result in Greece leaving the euro."
As the mini euro zone summit is taking place, Merkel will be holding talks with U.S. President Barack Obama, who is due to arrive in Cannes early Thursday. Heading into an election year, Obama is worried the euro zone crisis could blow up and hit the struggling U.S. economy.
The meeting of leaders from the world's 20 major economies will formally begin with a working lunch that had been meant to focus on the world economy, but is now likely to be dominated by Europe's debt woes.
Sarkozy had hoped to use his presidency of the G20 as a springboard for his own re-election campaign in 2012, setting ambitious goals including a rethink of the global monetary system and measures to fight commodity price volatility.
But he has been forced to scale back expectations as crisis-fighting has taken priority over grand visions of world economic reform.
CHINA WANTS DETAILS
Sarkozy met Chinese President Hu Jintao Wednesday as part of a European effort to convince the world's emerging powers to help boost the firepower of the bloc's bailout fund.
But he told the French president that it was up to Europe to solve its debt woes, according to a statement published by China's Ministry of Foreign Affairs.
China's deputy finance minister Zhu Guangyao said after the talks that Beijing needed more details from Europe before considering any bigger investment in the EFSF.
Doubts about Europe's ability to contain the debt crisis has put Italy firmly in the firing line.
The risk premium on Italian bonds over safe-haven German Bunds has hit euro-lifetime highs this week, despite European Central Bank buying of its bonds.
Italian Prime Minister Silvio Berlusconi has scrambled to come up with measures to placate markets, holding an emergency cabinet meeting to accelerate budget reforms amid mounting calls for his resignation.
The summit in Cannes is being held against a backdrop of rising public anger over economic gloom and a perception that taxpayers are being asked to pay for the sins of reckless banks. Authorities of expecting hundreds of protesters, but the leaders, who are meeting at the site where the annual Cannes film festival is held, are safely cordoned off and French policemen were everywhere on the streets.
(Writing by Noah Barkin; Editing by Alison Williams)