AS protesters battled police outside parliament last month in a hail of rocks and tear gas, Greece's beleaguered prime minister put his hopes in a secret phone call to an old friend. "Let us form a government of national salvation," George Papandreou, the Socialist prime minister, said to his chief rival, Antonis Samaras, head of Greece's conservative opposition and a buddy since the two men were roommates at Amherst College in Massachusetts 40 years ago.
The details of their secret mid-June talks reveal the degree to which two friends — each with far different prescriptions for economic salvation — hold the fate of Greece in their hands as the nation tries to get its nearly $500 billion in government debt under control. Their success or failure weighs on the potential survival of Europe's shared currency, the euro, the crowning achievement of 60 years of European unification.
On Monday, European bond markets fell after Moody's Investors Service cut Greece's credit rating three notches deeper into "junk" territory, warning that a bailout deal struck last week between European governments and banks will almost certainly trigger a Greek default — the first by an advanced Western economy in decades. Greece's plight has terrorized European financial markets for months.
Moody's said the €109 billion ($AU162.4 billion) bailout gives Greece a shot at revival after the expected default, provided the country can achieve even more painful fiscal austerity. That, however, depends on political stability in Athens — and on the outcome of the contest between Messrs. Papandreou and Samaras. If Mr Papandreou's slim hold on Parliament fails, the whole bailout plan could fall apart.
June's unorthodox effort by Messrs. Papandreou and Samaras to heal Greece's divisions almost led to a deal between the two men. In their June 15 phone calls, Mr Papandreou reasoned that a bipartisan pact could create a firmer footing for the painful austerity policies needed to keep the international rescue loans flowing. Mr Samaras demanded that Mr Papandreou resign. The two men nearly agreed, but their talks broke down, roiling markets all over again by demonstrating the potential for political instability at the epicenter of the euro crisis.
This account of the relationship between the two men is based on interviews with more than a dozen of their closest collaborators and longtime friends. Mr Samaras was interviewed by The Wall Street Journal; Mr Papandreou declined.
Mild-mannered Mr Papandreou, whose outlook was influenced by the American counterculture of his youth, once told his brother Nick that if he could take time off from Greek politics, he'd like to broker peace in an international crisis spot — or go hitchhiking with a guitar on his back. Instead, he finds himself telling Greeks they must accept toil, sweat and tears in the form of tax increases and spending cuts to avoid national bankruptcy. That message has helped spawn violent street protests.
Mr Samaras, an extroverted conservative with a history of nationalist rhetoric, insists the international bailout plan is ruining Greece. He says radical tax cuts will spur growth. His proposal is "unrealistic," say the European Union and the International Monetary Fund.
The showdown between the two men could take place as early as this fall if Mr Samaras gets his way and new elections are called. A political fight could thwart the EU and IMF and put Greece's austerity policies in doubt.
For more than a year, Mr Papandreou has been a pillar of Europe's strategy of funding Greece while it closes its vast deficit with higher taxes and spending cuts. But pain is spreading deep into Greek society. Unemployment has reached 16%, double the pre-crisis level. Businesses are dying. Angry middle-class citizens are joining the previously union-led protests in the streets of Athens. The mood of despair is boosting support for Mr Samaras's promise of a less-bitter medicine.
The two men are temperamental opposites yet close friends. An aide to Mr Samaras described witnessing a chance encounter between the two men outside a movie theater. They didn't greet each other, but simply began talking as if already in mid-conversation, the aide recalls.
Mr Papandreou, 59 years old, and Mr Samaras, 60, have known each other since childhood at Athens College, a private school known for training Greece's elite. Mr Samaras comes from a family with a patriotic local history. At the heart of family lore is his great-grandmother Penelope Delta, a famous writer who committed suicide in 1941 on the day the invading Germans raised the Nazi swastika over the Acropolis. Mr Papandreou, born in Minnesota to an American mother, came from an illustrious political dynasty. His grandfather, also called George Papandreou, was a moderate statesman. His father, Andreas, a prominent economist, became the firebrand left-wing tribune of Greece's poor.
Mr Papandreou became a liberal arts student at Amherst in the early 1970s, where he formed close friendships with a small group of Greek students, including Mr Samaras. The highly politicized environment that shaped them was characterized by "hippies, the Vietnam war, revolution, Nixon, Watergate, books that called for change in every way," Mr Samaras said in a Journal interview.
Mr Samaras, conservative-minded and a staunch anti-Communist, was an outgoing student who regularly organized trips to parties with students from women's colleges, says Stephen Manuelidis, a fellow Greek who also roomed with Mr Samaras. Mr Papandreou, who leaned left like his father, was a quiet student who strummed protest songs on his guitar, friends from those days say.
Messrs Samaras and Papandreou already had their minds set on Greek politics. "We will rule Greece together," they proclaimed one day in their Amherst dorms, Mr Manuelidis remembers. The boast was "between serious and a joke," given that Greece was ruled by a military junta, Mr Manuelidis says. When democracy returned to Greece, the two men entered parliament. Mr Papandreou lived in the shadow of his ebullient father, Andreas, who dominated Greek politics until he died in 1996.
Greece became more equal, but more indebted. The party founded by Andreas, the Panhellenic Socialist Movement, or Pasok, dominated government, while the conservative New Democracy was its main rival. Both parties built their political bases by handing out costly favors — including a vast number of government jobs — to win votes. A fiscal time bomb began taking shape.
In the early 1990s, Mr Samaras built his nationalist reputation when, as a youthful foreign minister, he took an uncompromising position with a neighbor: The newly independent, ex-Yugoslav republic of Macedonia. Mr Samaras's fiery denunciations of the new country's name — "Macedonia" has deep historical associations within Greece itself — fuelled vast street demonstrations in Greece in support of his stance. Fired as foreign minister, he led a rebellion that brought down his own government. A decade in the political wilderness followed. "I spent 11 years staring at the walls of my house," he says.
Mr Papandreou became foreign minister himself and set a different tone with the neighbors. Taking office in 1999, he sought to bury the hatchet with Greece's archenemy, Turkey, first by sending a Greek team to rescue people buried in a devastating 1999 earthquake there. He wooed Turkish opinion with idealistic speeches, and notably once danced a Zorba-the-Greek-style dance with Turkey's foreign minister. Still, Messrs. Papandreou and Samaras remained close. As Pasok leader in 2004, Mr Papandreou tried to bring free-market thinkers into his party and, through an intermediary, enquired whether Mr Samaras would like to join. Mr Samaras said he could never be a Socialist.
Mr Papandreou campaigned in 2009's elections as a modernizer and was swept to power. The incumbent New Democracy government had gotten mired in corruption scandals. He inherited a fiasco. The budget deficit for 2009 turned out to be 15.5% of gross domestic product, far worse than the previous government had disclosed. In spring 2010 Greece sought an international rescue. Mr Papandreou's government slashed pensions and public-sector pay, and increased taxes. Unions went on strike. Anarchists hurled Molotov cocktails.
Mr Samaras was now opposition leader. He supported spending cuts but demanded tax cuts instead of increases. Higher tax rates are hammering the economy, Mr Samaras says. In addition, he says, high rates backfire in Greek culture, where tax evasion is deeply ingrained thanks in part to a suspicion of authority that dates back to centuries under Turkish rule. He favors a flat-rate tax of 15% on business, arguing that it "would change people's mentality, because it would give you no honor to evade taxes."
The simple appeal of Mr Samaras's argument started to worry Greece's international creditors this spring, when the current government's strategy hit trouble. Austerity was deepening the recession. The deficit wasn't shrinking enough. The EU urged deeper budget cuts and Mr Papandreou — reliant on EU-IMF aid — agreed. Street protests escalated. His own party, Pasok, verged on revolt.
On the afternoon of June 15, according to Mr Samaras and several close advisers to both leaders, Mr Papandreou phoned his friend and offered him a national unity government. The premier hadn't consulted his cabinet. Mr Samaras asked his friend to step down as prime minister. "I don't want to hurt your feelings, but you cannot be prime minister of such a government," Mr Samaras said, stating that the premier had lost the trust of the markets and the nation. "If you really think I am the problem, I could go," said Mr Papandreou. If a successor could carry on his agenda of reforming Greece, he said: "I'm not stuck to my seat."
Mr Samaras asked for time to reflect, then called Mr Papandreou back. The pair agreed they would appoint a nonpartisan prime minister, who would cut the budget deficit but also negotiate easier bailout terms with Europe and the IMF. After that, they agreed, their coalition would give way to new elections. Mr Papandreou asked for time to consult his people. Pasok, however, was in an uproar. A television station reported news of the conversation, citing a high-level source inside Mr Samaras's party.
Financial markets gyrated. Greece wondered whether it had a government at all. The prime minister's horrified advisers pressed him to scrap his scheme. Mr Papandreou was upset that his friend, or somebody close to him, had leaked the news of their phone call, apparently to score partisan points by making the premier look weak. That evening, he phoned Mr Samaras to call the whole thing off.
Mr Samaras is under huge pressure from European leaders to support the austerity program and forget about tax cuts. He says he's right, and Europe is wrong, and complains that Mr Papandreou shouldn't have ignored him earlier in the crisis. "When the problem wasn't so big, he didn't consult us," he says. "Now he calls me up."
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