The Exit of Greece from the EU, seems almost impossible, inspite of Radical Leftist SYRIZA party's continuing mischiefs and as President Karolos Papoulias gives a final push to find an agreement on forming a government. Jean-Claude Junker signals that any "Harmonic Distortion" in Greece might be solved by the balanced use of circuitry impedances!!

[In a significant development, the chairman of the euro zone finance ministers, Jean-Claude Juncker, said, "If Greece can form a government and that government signs up to the bailout agreement, then it's possible some of the targets in the program could be softened". "I don't envisage, not even for one second, Greece leaving the euro area. This is nonsense, this is propaganda," Juncker, who also serves as Luxembourg's prime minister, told reporters, dismissing those who threaten Greece with expulsion."The exit of Greece out of the euro was not the subject of our debate today. Absolutely no one, absolutely no one, argued in that sense. But the Greek public, the Greek citizens, have to know that we agreed on a program and this program has to be implemented",he said after six hours of talks among the 17 ministers from the euro zone countries. Eight days after inconclusive elections, Greece's political parties have failed to form a coalitions. The central demand of radical leftist SYRIZA party leader Alexis Tsipras is to tear up the EU-IMF bailout agreement, which imposes harsh austerity on Greece...
Now Though, EU officials have stressed that room for renegotiation of the 130 billion euro bailout is very small, Juncker appeared to offer some leeway to Athens, if Greek parties manage to overcome differences and back the bailout reform plan. Therefore, in whichever way one looks, at the situation, it now seems that the exit of Greece from the EU, is of more of a "Fiction", than "Fact". Also, there are powerful incentives for keeping Greece afloat, not least that the ECB and euro zone governments are major holders of Greek government debt. A hard default could leave them with heavy losses and if the ECB needed recapitalizing as a result, that bill would also fall on its members' governments, with Germany first in line. Meanwhile, Spain has started to recapitalize its banking sector -- hit hard by a collapse of the Spanish real estate market--and its idea of external verification of the sector's health.The European markets could move up today (Tuesday)....after this Great Move, as Greece virtually now have Zero options, other than quickly form a government!!]

After the European Central Bank officials including Patrick Honohan of Ireland aired the pros and cons it seems it would be difficult for the Greece to escape the jaws of EU. According to them EU treaties declare the euro “irrevocable” and provide no exit procedure. A December 2009 study by the ECB’s legal department deemed an ouster or departure “so challenging, conceptually, legally and practically, that its likelihood is close to zero.” 

But then though Greece is in deep Financial Mess due to the lack of structural reforms for years, “Spain won’t be a second Greece,” Luxembourg Finance Minister Luc Frieden said. “Over the next three years the Spanish government, the Spanish budget will continue on the path toward better and healthier state finances. The road will be difficult and we will accompany Spain on the way.”

"What led Greece into this mess is its ineffective, incompetent, and corrupt political establishment, which viewed politics as a means of providing favours to special interest groups in exchange for vote-buying. Greece is the most highly regulated economy in the OECD. Profit margins or minimum remuneration is set by law in a number of professions (lawyers, engineers, accountants, pharmacists), and licensing requirements impose barriers to entry in others (trucking). It costs less to transport agricultural products from Central America to Greece by ship than it costs to transport them within Greece by truck. Labour contracts set wages on automatic pilot due to seniority clauses and other benefits unrelated to productivity, profitability, or performance. No amount of devaluation will get rid of these distortions. Appropriately, the new IMF/EU-funded programme includes broad-based structural reforms intended to introduce flexibility in labour markets and intensify competition in goods and services markets. In fact, the new Greek programme reads like a blueprint for reforming a post–Soviet bloc country circa 1990. It includes privatisation, administrative reform, labour and product market reform, and it provides for bank recapitalisation to ensure that the debt restructuring will not destabilise the banking system. While all this is positive for medium-term competitiveness and growth, it also means that the reform process will be protracted and politically difficult." argues, Miranda Xafa, CEO, E.F. Consulting; former executive board member, IMF.

Now, even, if Greece, tries to go out of EU, it has to come out with a white paper to bring in some form of radical reforms to revive a sagging economy. 

In a reassuring tone, the German Chancellor Angela Merkel, the dominant figure in two years of crisis containment, said Greece will “always” be part of the European Union, a 27-nation bloc with a common market, business regulations and trade policy. Speaking to a school group in Berlin, she didn’t offer the same assurance about Greece holding on to the euro, saying only that “it’s better for the Greeks to stay in the euro area.”  

While, Austrian Finance Minister Maria Fekter disputed that logic, saying Greece would need to quit the EU in order to pull out of the currency, then reapply to come back into the EU. She called on Greek politicians to stop playing for “political small change.”

Another positive point for the EU is the election of Francois Hollande, who is to be sworn in as French president in the first power shift to the Socialists in the second-biggest euro economy since 1981. Hollande’s bid to inject a pro-growth element into the austerity-dominated approach to the crisis got a boost when Merkel’s party was drubbed in elections in Germany’s largest, most industrial state, North Rhine-Westphalia.  Hollande campaigned against that treaty as well, pledging to flank it with pro-growth measures at a time of 10.9 percent unemployment across the euro zone, the highest since the currency’s debut in 1999. 

Meanwhile, polls shows that the large majority of Greeks do not want to quit the euro and return to using the drachma as the nation's currency. Yet most people in Greece also seem to believe the country's economy will never recover if it sticks to EU mandates to cut government spending enough to repay its debts. The EU has said that Greece cannot abandon its debts and continue to use the euro as its currency. So if Greece cannot form a new government in the weeks ahead and next month elects political leaders determined to reject the current EU/IMF bailout plan, then the nation will have little choice but to start printing and using its own currency again. 

Of course, not everyone believes the EU will force Greece into this position. The leaders of Syriza, the left-wing political party in Greece that recently finished second in Greece's May 6 general elections, think the EU is bluffing. This is why they have rejected any offer to form a government unless it preemptively rejects the bailout plan. They believe EU leaders won't risk this move because the impact would likely be to drive up interest rates for Portugal, Ireland, Spain, and Italy. One reason to think that might be true, at least for now -- Greece last week received a $6.7 billion bailout payment, despite the risk that it would renege on the agreement.

Besides, if Greece exited the eurozone, there would be difficulties, in re-instating border controls between the EU and Greece, which means people and goods going into or out of Greece would no longer have the automatic free entry they currently do. Leaving the currency, EU, will have other problems too for the Greece. First problem is that Athens won't have access to the European Central Bank as a source of funds; it will then have to issue its own money. 2ndly, it would also need to swap all the euros now held in Greek banks for the new drachma, which would be worth substantially less than the euro.

Also, Euro zone finance ministers dismissed talk of Greece leaving the euro zone as "propaganda and nonsense" on Monday, but said the country had to respect the terms of the bailout program agreed with the EU and the International Monetary Fund. If Greece can form a government and that government signs up to the bailout agreement, then it's possible some of the targets in the program could be softened, the chairman of the euro zone finance ministers, Jean-Claude Juncker, said.

Meanwhile, President Karolos Papoulias met with the heads of the conservative New Democracy, socialist PASOK and Democratic Left parties Monday in the eighth day of talks to resolve the deadlock. The leaders said the president had suggested creating a government of technocrats or "personalities," and will convene another meeting with the heads of more parties Tuesday to seek support. The leaders of Greece's two anti-bailout leftist parties said they will attend the third day of talks. Spokesman Panos Skourletis of the radical leftist SYRIZA group said it would attend the talks, as did Fotis Kouvelis, leader of the smaller and more moderate Democratic Left.
Arriving for a euro zone meeting in Brussels, Luxembourg Finance Minister Luc Frieden said: "If Greece needs help from outside, the conditions have to be met. All political parties in Greece know that." "We wish Greece will remain in the euro ... but it must respect its commitments," European Commission spokeswoman Pia Ahrenkilde Hansen told a regular news briefing. Euro zone finance ministers meeting later are expected to discuss the possibility of granting heavily indebted Spain more time to reach its budget targets, as well as Greece's situation. If Madrid could be cut more slack, Greek politicians will ask why not Athens too? 

EU officials have stressed that room for renegotiation of the 130 billion euro bailout is very small, although Juncker appeared to offer some leeway to Athens, if Greek parties manage to overcome differences and back the bailout reform plan. "If there were to be dramatic changes in the circumstances, we wouldn't preclude a debate about an extension of the period (for Greece to meet targets)," Juncker said. 

Besides, Greek opinion polls offer a glimmer of hope, showing a public overwhelmingly against more austerity but up to 80 percent in favor of remaining in the euro zone. If the mainstream parties, New Democracy and PASOK, could turn a fresh election into a referendum on euro membership and convince the public that SYRIZA would provoke Greece's ejection, they could fare better than on May 6, when their combined vote was more than halved.

Now, to raise the Greeks' morale the EU will have to relax Greece's deficit reduction targets, write off much more Greek debt and think more imaginatively about how to encourage external investment in Greece." We expect the ECB to ease policy, maybe through unconventional policies in coming months to support the situation in the (euro zone's) periphery," said Raghav Subbarao, currency strategist at Barclays. Also, Europe's beefed-up bailout fund may have the resources to protect Spain if needed.

SO, THE SITUATION IN EUROPE IS LOOKING MUCH BETTER THAN LAST WEEK--the markets should react positively today (Tuesday).

References: 

(i) http://www.voxeu.org

(ii) http://www.cbsnews.com

(iii)http://finance.yahoo.com

(iv) http://www.cnbc.com