After weeks of turmoil and mounting economic chaos, Greeks are voting, for the second time in a month, whether to form a government that will accept the austerity package and keep Greece in the euro or whether, in anger and despair at plunging living standards, to reject the EU rescue package and its tough conditions. If Greece votes for the new parties rejecting any further cuts in living standards, the country's EU partners will almost certainly expel Greece from the euro zone But if Greeks are forced to go back to the drachma, the consequences are incalculable. Not only will this lead to unprecedented turmoil in Greece itself; it will also put huge political and economic pressure on other shaky economies, especially Portugal, Ireland, Italy and Spain. A new round of merciless market attacks on the single currency could then lead to the break-up of the eurozone, provoke nationalist passions in many EU members and deal a possibly fatal blow to the very concept of European integration. All Greece's partners still maintain that they want to keep Greece in the euro. But even as they mouth support for Athens, governments throughout Europe and bureaucrats in Brussels are quietly preparing for the worst-case scenario: a Greek default on its huge debts, the disorderly collapse of its economy and spreading contagion that would affect even the strongest nations in the eurozone as well as Britain and other main trading partners outside the euro. Governments are desperately trying to build firewalls to protect vulnerable economies in southern Europe, and pressure in growing on Berlin, the paymasters of the euro, to relax its stringent austerity conditions and allow the European Central bank to provide virtually unlimited credit to fend off market speculators. Most Greeks still say they want to remain in the euro, and most still argue that their partners will be forced to come to their rescue again.
But doubts are growing. Huge amounts of money are now draining out of Greek banks as savers and investors desperately search for a safe haven elsewhere in the eurozone. For the moment, Greek banks are still solvent. But unless the country's caretaker government can stabilise the situation, it may rapidly become critical. Greece could be bankrupt even before the first vote is cast in the next election. The treaty setting up the eurozone has no provision for a country wanting to leave or being expelled. No one therefore knows how a "Grexit", as the move is already termed, would work. What is clear is that the logistics are formidable. Any return to the drachma would necessitate the printing – in secret, and almost overnight - of millions of new notes, their safe and clandestine distribution to all the country's banks, and the overnight announcement of the change. Overprinting existing euros would be very difficult, as the country's borders would have to be sealed, all cross-border financial transactions would be suspended and all existing euro notes in Greece would be worthless until denominated in drachmas. The new currency would be set at a rate well below the value of the drachma when Greece joined the euro, and almost immediately it would have to be devalued as market confidence drained away, together with any existing reserves. Calculations by Goldman Sachs, the US bank, reckon that the drachma would have to be devalued by at least 30 per cent compared with the rest of the eurozone and by at least 50 per cent compared with Germany.
Within Greece almost all economic activity would come to a halt until the new currency was in place and had stopped falling in value. Imports would be frozen, foreign debts would be unpaid and Greek exports fluctuate wildly in price. Further austerity would still be needed because Greece's economic is shrinking, and tax revenues would still fall short of public spending. In the long term, however, Greece would finally be in a position to start building up its economy again. If it can avoid hyperinflation, its economy would be much more competitive. Tourism, the main earner, would lure back the many visitors who now find Greece too expensive. And Greeks would not need to cut their wages further in order to trim back spending. The cost is prohibitive. But for many Greeks and an increasing number of other Europeans the alternative - austerity - is becoming politically unacceptable. Europeans are no longer able to contemplate a dip in living standards. Countries that have built up modern welfare states have huge difficulty cutting back benefits and entitlements now seen as a right by most voters. The old postwar ethic of hard work - a necessity when Europe was recovering from wartime devastation - has given way to a leisure culture that is difficult to reverse. The French presidential election showed that even in France, few voters were willing to accept further austerity, and supported President Hollande's promises of a growth package instead. A Greek exit would make a growth package elsewhere more difficult, however, as market confidence in the entire euro zone would be dented. Banks holding Greek debt would lose billions, so they could lend less, and there would be a new run on the banks in those countries already highly indebted.
What of the richer euro countries? The key lies with Germany, the only country still showing healthy growth rates - thanks to its ability to export relatively cheaply throughout the euro zone. German voters, however, strongly resist the idea of any further bail-outs, for Greece or for any other weaker economies. They believe that these nations have been living beyond their means and should pay the price themselves, rather than rely on their richer, harder-working Germany partners. But Angela Merkel's government is coming under growing pressure, at home and abroad, to change its views. The Social Democratic opposition, which supports a growth package, has been making gains in recent state elections. And Germany's partners have told Berlin bluntly that if the eurozone breaks up because of German intransigence, it will be the Germans who would suffer most. A new German currency would rise sharply in value, making German exports uncompetitive and undermining the basis of Germany's current impressive growth. Finland, the Netherlands and Luxembourg, the only other eurozone members showing healthy surpluses, would be similarly affected.
To those eurosceptics in Britain who always forecast that the euro would mfail, the present crisis seems to justify their warnings. They argued that a "one-size-fits-all" interest rate would lead to huge distortions and produce bubble economies - as it did in Ireland. They also said that unless there was fiscal and political union, a currency union would never work unless all participating government pursued the same economic strategies. But though right, the eurosceptics are hardly likely now to gloat. For the eurozone crisis is already hurting exports from Britain and other non-euro countries to their main markets. And even economies further afield, such as China, India and the US, will be affected by a new round of currency jitters and a downturn in economic confidence. Even more seriously, if the eurozone unravelled completely and each nation reverted to a national currency, economic activity in Europe would be damaged for years. Political quarrels would grow. Each country would start blaming its neighbours for falls in living standards. This could lead to an ugly reappearance of xenophobic nationalism, a breakdown in political cooperation in other fields and the possible growth of extremism, instability and the kind of cross-border tensions that the creation of the European Union was meant to rule out for ever. The only consolation is that the Europeans have seen this crisis coming and have had time to start preparing a response. The Greek drama, like a classical tragedy with hubris followed by nemesis, has been running for some time. The chorus has been speaking of doom, and the wider European audience has started taking measures to avoid a similar fate. Italy and Spain, both once seen as vulnerable, have governments determined to take the tough, unpopular measures needed. The new French government may soon have to adjust election campaign rhetoric to the new reality. And Germany, aghast at the blame heaped on Berlin by so many other Europeans, has seen the dangers to its own interests. The leaders of the eurozone may still be furious that the vision of a single currency has gone awry. But at least they now know that unless they take tough, coordinated measures to protect themselves, the ruin in Greece could bring them all down.