Will tiny Greece bring the mightly eurozone down?

By R Jagannathan

Like a mosquito that’s gotten into an elephant’s ear and driven it crazy, tiny Greece could well bring down the mighty European Union.

Unlike the French election, which at least produced a clear winner, the Greek one only produced chaos - a sharp swing away from the two main pro-EU parties (New Democracy and Pasok) to far-Right and far-Left forces.

The vote clearly was against the EU-imposed austerity package and the $170 billion bailout deal of February under which Greece’s creditors accepted sharp “haircuts” (75 percent loan writeoffs) in return for Greek wage and pension cuts, among other things.

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While the chances are the two pro-eurozone parties will ultimately bury the hatchet and form a government, the mood swing in the electorate is clearly anti-EU, with Syriza, a coalition of radical Left forces led by Alexis Tsipras, calling for an agenda to repudiate the bailout and, if needed, opt out of the eurozone. The Greek mood is anti-EU, and whoever forms a government will certainly seek to re-negotiate the austerity packages - which German Chancellor Angela Merkel has already rejected.

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If there’s no government possible by 17 May, there will be another election in June. But given that Greece is already living hand to mouth, a default on its debts could happen well before that, setting off a domino effect among some of the eurozone’s other near-basket cases - including Spain and Italy.

The big question is this: will Greece finally exit the eurozone or be turfed out by the others, who don’t want their new fiscal compact to be busted so soon after a bailout? As of now, only the Germans want the Greeks to eat crow.

According to The Economist, “Odds of a Greek departure from the eurozone appear to be rising sharply; Intrade now puts the chance of exit in 2012 at close to 40 percent, up from 22 percent a week ago.”

But if Greece goes down, it won’t go down alone. Greece’s collapse would signal to the markets that there may be other vulnerable countries like Spain and Italy - where too austerity measures are crumbling, and politicians increasingly unhappy about asking the public to keep accepting economic pain.

The French election has already punctured the old Franco-German EU leadership of Nicolas Sarkozy and Angela Merkel (Or Merkozy) which called for more austerity than growth to lift Europe out of the morass.

But the French under incoming Socialist President Francois Hollande have already signalled a break with austerity. Hollande said the other day after his victory: “My mission is now to give Europe growth, jobs, prosperity and a future. We are not doomed to austerity.”

The Italians are also getting restive. Silvio Berlusconi’s party, People of Liberty, is now saying it will not back the new EU fiscal treaty that Merkel has rammed through, and wants the European Central Bank to become a true central bank like the US Fed, which has managed to rescue America from disaster by endlessly pumping in liquidity. Berlusconi’s party has accused Prime Minister Mario Monti of behaving like Germany’s viceroy.

The picture throughout Europe is a mood that is shifting against austerity with the solitary exception of the Germans.

Ambrose Evans-Pritchard, writing in The Telegraph, suggests that Angela Merkel has more or less been isolated in Europe on her austerity bid. “The political dam has broken in Europe. German Chancellor Angela Merkel no longer has enough allies in the club of EU prime ministers to impose her hairshirt agenda. Her methodical plans are disintegrating on every front. "

The European Commission has called for an investment programme to stop the slide of Europe into deep recession. European Central Bank chief Mario Draghi, an Italian, also wants a growth compact.

The writing on the wall is clear: Greece is forcing a choice on Germany Europe. Either it has to become a full-fledged monetary and fiscal union, or go bust.

Merkel may be happy to see the Greeks out of the EU, but Greece won’t go quietly.