© Reuters/Kai PfaffenbachShare trader Robert Halver reacts as the German share prize index DAX reaches a six percent loss during the afternoon trading session at Frankfurt's stock exchange November 1, 2011.
George Papandreou stunned his own people and his European colleagues with the announcement on Monday evening, only days after European leaders had agreed the outlines of a second bailout for Athens at marathon summit talks in Brussels.
The move hammered markets and prompted leaders of the big euro zone countries to hastily arrange a crisis meeting with Papandreou on Wednesday in Cannes, a day before the start of a G20 summit.
"Everyone is asking why Papandreou is doing this? Why now? Is he messing with us?" the top-selling tabloid Bild said on its website.
Michael Roth, Europe spokesman for the opposition Social Democrats (SPD), told Reuters the referendum call showed courage but said Papandreou was "playing with fire."
"If the Greeks are not ready to support Papandreou's reforms, Greece faces an uncertain future in Europe," he said.
Greece has been hit by a wave of anti-austerity strikes and Papandreou has suffered defections by lawmakers in his Socialist party. He said he needed wider political backing for deep spending cuts tied to the new 130 billion euro aid deal.
A poll at the weekend showed nearly 60 percent of Greeks had a negative or partly negative view of the rescue, suggesting a majority of voters could vote 'no' in the referendum, which will probably be held early next year.
Norbert Barthle, a budget expert in Merkel's Christian Democrats (CDU), said the referendum call put a big question mark around that aid package, complicating plans to get banks to accept 50-percent losses on their Greek debt holdings.
Greece is due to receive an 8 billion euro tranche of aid in mid-November, but is likely to run out of cash again in January, around the time when the referendum takes place.
Countries like Germany, Finland and the Netherlands may find it difficult to defend funneling more cash to Athens over the coming months with the threat of the referendum looming.
The opposition Dutch Labour Party described Papandreou's gambit as a "deal breaker" that would doom parliamentary approval of the latest rescue measures.
Eurosceptics Applaud
Leading German eurosceptics welcomed Papandreou's announcement, however, saying it was high time European electorates were consulted on what some Berlin parliamentarians believe is a doomed policy of never-ending bailouts.
"I think it's good, because you can't keep carrying out policies against the will of the people, it won't work," ruling Free Democrat (FDP) lawmaker Frank Schaeffler told Reuters.
"In Greece and in Germany we are making the mistake of not consulting the population enough in this process. I fear that the Greek people will speak out against these measures because they haven't been consulted, which will mean the collapse of this debt bailout logic."
Other experts described the announcement as poorly thought-out and warned that the consequences would reverberate far beyond Greece's borders, dragging down the entire 17-member currency bloc.
"Papandreou is playing all or nothing. That's not just risky for Greece, but also for the euro zone as a whole," said Commerzbank chief economist Joerg Kraemer.
He warned of economic chaos if Greek voters rejected the bailout deal and the country was forced into bankruptcy.
"In this situation Greece could exit the euro zone and try, with a weaker currency, to get back on its feet. But this is a long and very risky path," Kraemer said.
Walking near the Brandenburg Gate in Berlin, 26-year-old student Konstanze Pilge summed up the resentment that many Germans feel toward a country that manipulated its budget figures to enter the euro zone and lived above its means, accumulating a debt mountain of nearly 360 billion euros.
"You can't help thinking that they should be grateful as Europe is trying to help," said Pilge. "Now it looks like they are going to mess things up."
In a real democracy the people are consulted on important issues. They are invited to participate in the running of a country, instead they are being alienated from the rule of the land.
A lot more problems are coming in the western world as democracy has only been rhetorical and not real. People are getting fed up of being ruled by the pathocratic elite.