As Greece votes, Europe holds its breath

Europe is bracing for Greek elections Sunday that may propel that nation out of Europe’s common currency zone – a prospect unthinkable a few years ago. 

In Athens Sunday, the chief question is whether Greeks will vote into office a government or coalition able to negotiate with EU authorities on terms of EU and IMF bailouts doled out since May 2010. A Greek government unwilling to meet terms would quickly set up a departure from the euro and a return to the Greek drachma.

Runs on Greek banks this week reportedly have depositors pulling out between as much as $750 million to $1 billion a day.

Nor is it very clear at this point whether even an avowedly pro-Europe government could ultimately keep the country in the eurozone.

A Greek departure from the eurozone is widely seen as reshaping the map of Europe, and the prospect has deepened fears of the unknown at a time of political and economic crisis after several years of austerity.

If Greek elections do not quickly bring a negotiation with the EU, “we enter a zone of great danger for the euro area, because no one knows the consequences,” says Thomas Klau of the European Council of  Foreign Relations in Paris. “All eyes are on Greece right now.”

Greeks: we want to stay in eurozone

Nearly 80 percent of the Greek population say in polls they want to stay in the eurozone, but they do not want a crippling austerity-based financing of their debt that would sentence them to penury for the foreseeable future.

Yet their options appear to finally be running out.

With Europe’s banking and debt crisis deepening, moreover, and with vulnerability now spreading to Spain and Italy, analysts warn that Greeks who have assumed that the EU will finally rescue their nation, come what may, are miscalculating.

“There’s been a feeling in Greece that eurozone leaders are bluffing and will do anything to stop Greece from leaving…. I’m not sure that is any longer the case,” says Simon Tilford of the Center for European Reform in London. “A Greek departure from the common currency would certainly dispel the myth of irreversibility of the eurozone.”

Sunday’s elections are the second for politically unstable Greece this spring, after a vote in May failed to form a coalition. The May elections were called by the “technocratic government” formed in December after Socialist Party prime minister George Papandreou suddenly announced in November he would step down at a time when public anger over austerity imposed as part of a Greek bailout by the EU rose to new heights.

The fall of Mr. Papandreou’s government followed the fall of leaders in Ireland, Portugal, and elsewhere as a result of the euro crisis.

The view in Athens as Papandreou left was that no Greek political party could, without the mandate of the people, agree to such unpopular terms. On Sunday the Greeks will be asked to buy into or buy out of the bailout terms: a reform program to cut spending further in exchange for some $214 billion from the IMF and EU.

As the larger Greek economy reels, however, more analysts are saying a Greek return to the drachma may not be a matter of if, but when. “The Greeks are being asked to do the impossible,” in their austerity reforms, says Mr. Tilford. “Capping public spending in a severe recession…. the terms are mathematically impossible.”