On the European level the problem with the referendum is not so much that people are being given a say - though there are probably elements that argue that, there needs to be a democratic buy-in of the Greek people into any plan for it to work properly - rather that it crystalises the issue. When presented with the referendum the Greek people will be asked to say yes or no to the deal: a yes would mean buying into the process so far and imply support for however it evolves; a no would mean the end to the loans, complete default (along with the instant austerity that the inability to fund the deficit implies) and probable exit of the Eurozone.
While this could be a clever move by Papandreou to bounce the electorate into supporting the government in a choice between two defaults, for the Eurozone it raises the spectre of a non-negotiatable stance, and a toxic debt fallout that will force a decision over Italy. Though Greece probably needs more haircuts over time and a plan for growth so it can service its remaining debts and rebuild its economy, this slow evolution of the Greek Crisis (though not necessarily inevitably moving in that direction) has been short-circuited by the referendum announcement. A "No" would mean that Greece would be dropped so the Eurozone could deal with Italy.
There has to be a real buy-in by the Greek people in the solution to the crisis: with all the strikes and the uncollected taxes, Greece can't recover unless there is a majority for reforming the state and the economy. With, as EUObserver reports:
"Polls over the weekend put Greek popular opposition to the new EU deal at 60 percent and the viability of the government is under threat from rolling general strikes and frequently violent protests that reach almost every quarter of the country.
At the same, polls put support for retention of the euro at 70 percent."
the binary choice of default within or outside the Eurozone might pass, and offer the Greek public to decide whether or not they want to be part of the Eurozone deal - and how much they want to be part of the Eurozone. But in the absence of a real debate about other options - however workable - that a parliamentary election might allow (essentially forcing the government and opposition to set out their alternatives), it's hard to see how much a "yes" vote would signal acceptance of the Eurozone's direction, and how much it would constitute a democratic buy-in by the Greek people.
It may turn out to be a masterstroke by Papandreou: giving the people a greater say and building a wider consensus in society, or it could backfire, either as a No, or as a Yes with no real substance to it. In any case, the Greek people are caught in a tale of two defaults, with an unenviable decision.
Edit: While I'm slightly sceptical of the referendum because of its limited choice, Polscieu has written a great post in favour of it.