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Eurozone without Greece increasingly imaginable -- outside Athens

May 11, 2012 |  5:10 am

Greek protesters

Despite the first hopeful sign this week that Greece might manage to put a government together, European Union neighbors and global economic analysts are increasingly skeptical that Athens will be able to remain in the Eurozone.

GlobalFocusGreeks, on the other hand, say they can't imagine giving up their membership in the common currency club that has been the crowning achievement of a nation that has gone from military dictatorship to a thriving, if often unruly, democracy in less than four decades.

Even Alexis Tsipras, who has been brashly talking about halting payment on the country's staggering debt, hasn't cast the outpouring of Greek voters' resentment toward austerity measures imposed in exchange for bailouts as a move to exit the 17-nation Eurozone. Rather, he and other leftist leaders say, the threat of default is aimed at pressuring Germany and the troika of international creditors to ease up on the spending-cut mandates that have put 1 in 4 Greeks out of work, slashed national income by 25% and boosted taxes by more than 20%.

But after Sunday's election tossed out the government that agreed to the harsh terms of the bailout,  the word from the European Union, the European Central Bank and the International Monetary Fund has been that Greece is expected to live up to its obligations.

German Finance Minister Wolfgang Schaeuble, major bank economists and political analysts around the world are now acknowledging that Greece may have little choice but to default on its obligations and restore the drachma as the national currency, which it can prop up or devalue as Greeks see fit.

“They will decide whether to stay in the Eurozone or not,” Schaeuble said during a visit to Brussels, echoing comments made by German Chancellor Angela Merkel that the conditions imposed in exchange for bailouts over the last two years aren't up for renegotiation.

Fotis Kouvelis, leader of Greece's Democratic Left, which got about 6% of Sunday's vote, raised hopes Thursday of a possible governing coalition emerging this weekend after what he described as a meeting of the minds with Socialist leader Evangelos Venizelos on the need to remain in the Eurozone but begin a "gradual disengagement" from the harsh austerity measures. Venizelos said his views and those of Kouvelis were "very close," but gave no indication that an agreement on a government was likely during the Socialists' three-day turn at leading the negotiations.

Greek President Karolos Papoulias is expected to make a last-ditch effort Saturday at bringing the political forces into a government of national unity. Meanwhile, talk has begun to turn in favor of calling a fresh election next month and trying to unite centrist parties so the vote is less scattered, said Ruby Gropas, a law school lecturer on international relations and scholar at Athens' Hellenic Foundation for European and Foreign Policy.

"There is completely unquestioned commitment to Europe and the euro," said Gropas, calling her homeland's entrance into the Eurozone among its proudest achievements in the postwar era and a stabilizing political influence despite its sharp bite into family budgets. "What is being challenged is the austerity measures. The pressures of globalization have been too huge, but the only way we can mitigate and manage this crisis is through a European approach."

Polls in Greece show unshaken popular support for the common currency, with a recent survey finding 77% of respondents claiming to be willing to do whatever is necessary to keep their euros.

But the popular opinion survey that counts most, Sunday's election, sent a resounding blast of opposition to the cuts in government jobs and public spending imposed on Greece in return for triple-digit billions in bailout money to keep the country afloat. No party got anywhere near a majority, with the conservative New Democracy Party coming in first with less than 19%, and the Socialists barely clearing 13%. The rest of the vote went to a smattering of fringe parties that had campaigned against the austerity measures.

Stumbling through another month of a political vacuum while arranging a new election would be nerve-wracking, Gropas said, but the alternatives for Greece and its creditors are worse. Sunday's vote was so fractured and spanned from the extreme right to the far left that 1 in 5 ballots was cast for parties that didn't clear the 3% threshold to gain seats in Parliament. That is a sizable chunk of support for centrist forces that, if united and aligned with the traditional political parties that have governed Greece for decades, would provide a clear majority to push through reforms long overdue and demanded in exchange for the bailouts, Gropas said.

"I don’t have a choice but to be confident. The other option, leaving the Eurozone, is not imaginable," she said. "A lot of unthinkables have happened in Europe and Greece in the last two years, but this is something nobody wants."

What Greece wants and what it can have may be different prospects, according to economists and analysts at major banks and think tanks. Ross C. DeVol, chief research officer at the Milken Institute in Santa Monica, said Greece never met the European Union criteria for membership in the Eurozone and he believes "it is just a matter of time" before it abandons the common currency or gets kicked out for failing to meet its obligations.

"At some point, the Greek people have to decide what path they want to choose, whether it is more important to remain part of the Eurozone for European unity purposes, or are the draconian measures to do so too severe and the path forward for them is the need to restore competitiveness, drop out of the Eurozone and go back to the drachma," DeVol said.

Were Greece to miss next month's deadline for cutting more jobs and public spending, the lending troika would have to write down much of its debt, DeVol said. The loss would be absorbable for the huge institutions, he said, but could have a contagious effect in weakening the commitment to the common currency in other struggling euro economies, including Portugal, Ireland and Spain.

"The important domino is Spain," DeVol warned. "The European Union, the European Central Bank and Eurozone officials do not have a sufficiently large bazooka in place to withstand a potential sovereign debt default in Spain."

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Photo: Greek protests against austerity measures have become daily occurrences as Greeks have struggled through soaring taxes and falling incomes. Some, as in the June demonstration shown above, have turned violent. Credit: Yiorgos Karahalis / Reuters

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