The turmoil in Greece continues unabated. While politicians in Athens and Brussels talk about how the eurozone can weather the storm and prevent Greece's problems spreading into other countries, thousands of protestors have taken to the streets in response to the Greek government's austerity measures. Meanwhile, the leading credit rating agency Standard and Poor's stated that Greece's credit rating faced being downgraded to BBB-, only marginally above junk status. In economic and political terms, it is a perfect storm.

So what are the numerous options facing Greece and the eurozone?

Firstly, Greece can seek a bail-out from fellow eurozone countries. At a recent summit, EU leaders, along with the president of the European Commission, Josè Manuel Barroso and Jean Claude Trichet, president of the European Central Bank, appeared to agree to this, releasing a declaration that, if necessary, they were prepared to shore up Greece's finances. However, the leaders of the two richest eurozone countries, Germany and France, did not spell out any details.

It is still unclear whether this was merely a political statement of support or a promise of money. Both Angela Merkel and Nicholas Sarkozy used the same phrase that "a very clear political signal" had been sent, with Ms Merkel adding that "Greece would not be left on its own but there are rules and these rules must be adhered to". This offered more confusion and more market speculation.

Indeed, a eurozone bail-out would pose many questions. What form would the financial help take? Would it be a credit line, guarantees for a loan and, most crucially, where would the money come from and how much would European taxpayers have to provide? These are all huge political obstacles.

Another potential problem is the legality of a eurozone bail-out, a point which was emphasised by President Herman Van Rompuy last Wednesday in a meeting with my Socialist and Democrat group in Brussels.

Article 125 of the Lisbon Treaty is commonly referred to as the "no bail-out clause" and it clearly states that the EU "shall not be liable for or assume the commitments of central governments... or public undertakings of any member state". Politics is famously referred to as "the art of the possible", but would a Greek bail-out stand up in a court of law?

A second option for Greece would be to go to the IMF for a rescue package. Apart from the fact that there are divisions within the eurozone on whether the IMF would be better placed to rescue Greece, for the IMF to step in would be a huge political blow to the pride of the EU project and to the Greeks.

It would be a massive admission that European monetary union, and, with it, social cohesion, has failed. It would, inevitably, also impose tougher austerity measures on the Greek people.

Meanwhile, respected economists and commentators offer their own solutions.

Martin Feldstein of Harvard University has suggested allowing Greece to leave the eurozone. In a similar, albeit nuanced, vein, Charles Goodhart of the London School of Economics has talked about both Greece and Portugal reissuing their old drachmas and escudos alongside the euro in an effort to reach a more competitive exchange rate.

These two economically sound propositions, coming from two eminent economists, have, however, many political problems attached. Leaving the euro would also be an enormous national embarrassment to the Greek establishment which, like all PIGS and piglets in the eurozone, were desperate to join the euro at any cost to the extent that some cheated in a big way, others in a small way.

Up to now, Greece is yet to ask anybody for a bail-out. Some in the Greek government say it would completely undermine the credibility of its budgetary plans to cut its deficit by four per cent from its 12.7 per cent level this year. But the truth is that, like some of the PIGS, it is extremely dubious that Greece will meet its deficit reduction plans.

Moreover, while the financial markets continue to panic and Greece is subjected to speculative attacks, its situation will get worse.

Sitting on hands and leaving Greece's fate in the hands of the speculative financial markets could lead to Greece defaulting - which, in turn, would have a massive spill-over effect on the rest of the Mediterranean countries, particularly Portugal and Spain. To avoid such catastrophe, Greece needs to show it is backed by a pool of hard cash, not just words.

One thing is for sure: Europe's political leaders must be decisive and act quickly. With every day that passes, Greece's credit rating gets worse and the strength and reputation of the eurozone is weakened. This financial crisis is the biggest test yet faced by the eurozone.

There are many, many questions. But there are no correct answers.

edward.scicluna@europarl.europa.eu
www.edwardscicluna.com

Prof. Scicluna is a Labour member of the European Parliament.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.