If George Papandreou wanted to impress his creditors with fiscal and political stability in Greece, he could hardly have done worse over the last few days. Papandreou made a deal with his EU partners for a second bailout of Greek debt that relies on austerity measures to control the nation’s deficit spending and debt. Instead of pushing that deal through the Greek parliament, Papandreou shocked Europe by suddenly calling for a referendum to approve the deal — a plebescite that would almost certainly fail, leaving the euro ready for a total collapse. Today, however, Papandreou backpedaled from the referendum, claiming that the opposition’s approval would make it unnecessary:

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Greek Prime Minister George Papandreou on Thursday softened his stance on a referendum on the country’s vital bailout package and offered to hold talks with the opposition to resolve the country’s political crisis.

In a speech to his cabinet on Thursday, Papandreou said he would assign the task of discussions with the opposition to two senior party members and praised their support of the bailout deal. If the opposition agreed to back the deal in parliament, no referendum would have to be held, he said.

“I will be glad even if we don’t go to a referendum, which was never a purpose in itself. I’m glad that all this discussion has at least brought a lot of people back to their senses,” he said in the text of his speech released to media.

Papandreou’s proposal earlier this week to put the hard-fought bailout package to a referendum horrified Greece’s international partners and creditors, triggering turmoil in financial markets as investors fretted over the prospect of a disorderly default and the country’s exit from the 17-nation eurozone.

ABC now says that the referendum has been scrapped — and some in Greece want to scrap the Papandreou government as well:

Ignoring increasing calls to step down, Greece’s prime minister announced Thursday he would seek emergency talks with the opposition conservatives after they agreed to back the latest European bailout for Greece.

Prime Minister George Papandreou, speaking at an emergency Cabinet meeting, warned that an early election was too dangerous because it would force Greece into leaving the 17-nation euro currency.

Papandreou sparked a continentwide crisis Monday when he announced he would put the latest European deal to cut Greece’s massive debts — an accord that took months of negotiations — to a referendum. The idea horrified other EU nations and Greece’s creditors, triggering turmoil in financial markets as investors fretted over the prospect of Greece being forced into a disorderly default.

Two officials close to Papandreou said Thursday the referendum idea has now been scrapped, after the debt deal won some support from the opposition.

It’s not just Greece that threatens the euro at the moment.  Berlusconi’s government in Italy might be on its way out as well, thanks to a failure to address its own high debts, and Portugal now wants better terms on the bailout the EU already secured for Lisbon.

Will Greece leave the euro?  There were some rumblings of that today (ABC mentions the possibility toward the end of the article), but Papandreou’s capitulation and almost-certain exit will keep Greece within the euro fold, says the Guardian’s Vassilis Monastiriotis.  While developments today are positive for the global economy, don’t look at Greece’s near-term future with much optimism, he warns:

Even though at the time of writing Papandreou seems to be trying to cling on into power, it is clear that we are moving towards the end of the Papandreou era. Given the political, economic and social deadlock that Greecehas experienced over the last two years, this must be a positive development. The problem is that much uncertainty about the future remains. It seems now that no referendum is going to take place. The Eurozone agreement is going to be ratified and Greece will remain, for the time being, inside the Eurozone. But the ratification of the agreement and the interim government will not calm either the economic or the political turmoil.

Greece will now enter a tense election period that will put more strain on public finances (with collapsing revenues and rising expenditures) and, more importantly, will not resolve the problems of political instability and legitimacy. It is very unlikely that the elections will bring into power a strong and stable government. More likely, they will bring new rounds of political bargaining for the formation of a coalition government and for an agreement on a policy programme consistent with the Eurozone bailout agreement.

The EU has hitched its wagon to a very unreliable partner.  That’s not just an indictment of Papandreou, but also of the nation he leads.