ANALYSIS:Exit of any nation could put tidal wave of pressure on euro zone's other weaklings

THE DEBT crisis has moved into a new phase. Italy and Spain came close to the abyss last month and the ailing Greek bailout seems at times to be near the point of collapse. Senior Europeans have now begun to speculate openly about the country being kicked out of the euro zone if it fails to put its house in order soon.

Such talk used to be anathema. But Dutch premier Mark Rutte and his pugnacious finance minister Jan Kees de Jager crossed the Rubicon yesterday when they suggested in an opinion piece for the Financial Times that countries which persistently break euro zone budget rules should face the ultimate sanction of expulsion.

This raises hugely sensitive questions for Ireland and other vulnerable members. At the highest levels in Europe, it is feared that the exit of any country would lead to a tidal wave of market pressure, with one weakling after another forced from the union as markets question their capacity to survive.

It’s that serious. Facing down calls within her own administration for Greece to be expelled from the currency, no less an eminence than German chancellor Angela Merkel warned this week that removing Greece could trigger a dangerous “domino effect” on other countries.

This is no trivial concern. Ireland’s mountainous bank debt is a huge weakness and would be certain to be attacked in a Greek exit scenario.

The same goes for Portugal, whose low potential leaves it vulnerable to assault. Acute fiscal weakness does not end with these two countries, of course, so the fear remains that up to half a dozen countries might struggle to stay within the euro if the evil day ever came.

This is what is meant by the notion of a “two-speed Europe” incarnate, with wealthy countries around the core German engine using an efficient common currency unencumbered by the bad behaviour of their former partners on the poorer periphery of the euro zone.

Many leaders, however, see all the ingredients for the end of the European project as we know it in such an eventuality. Others are more circumspect, arguing that the outcome need not necessarily be as toxic as that.

But leaving the currency would be brutal nonetheless. The country in question would be faced with immediate risk of sovereign and corporate default, collapsing banks and a big reduction in trade. The brunt of such costs would be borne by ordinary people, meaning any such move would not be without deep political impact. With jobs, bank deposits and pensions vanishing, the conditions would be ripe for an outbreak of demagoguery.

In short, the risk is that a solution to tackle chaos in markets due to the debt debacle – and the current scene is nothing if not chaotic – risks triggering an even greater level of tumult. While breaking up the euro zone would damage the pride of EU leaders, the biggest hindrance lies in the practical consequences.

Yet Rutte and de Jager are merely saying in public what senior figures in Brussels and beyond have started to whisper in private, and with increasing frequency. By uttering the unmentionable in so public a forum, they demonstrate in very clear terms that patience is rapidly running out with the Greeks.

Again, this week, Athens pledged to intensify the austerity effort, but it took the collapse of talks with the EU-IMF “troika” to extract such promises. The reality is that many in the bailout world are now conditioned to disbelieve most of what they hear from the Greeks, something which raises grave doubt over the EU-IMF rescue strategy for the country.

In Brussels, the joke goes that the present state of affairs could lead to bailouts for Greece continuing into 2020 and beyond – with bitter conflicts every 12 weeks or so with the bedraggled troika. That’s unlikely to happen of course, but frustration runs very deep indeed.

This reflects increasing concern that Greek administrative system lacks the sophistication required to reform from within. Greek leaders, who could run out of money to run the country within four weeks, are habitually accused of cowardice and incompetence.

Last May, in the midst of a previous bout of Greek dilly-dallying over its reform programme, the country’s EU commissioner warned that a return to the drachma was in prospect if control was not quickly asserted over its wayward finances.

Inevitably, Maria Damanaki’s remarks were dismissed as an ill-informed flight of fancy from someone who is not to the fore of the battle against the crisis. The same cannot be said of Rutte and de Jager, a man who has emerged in the past year a prime figure among euro zone finance ministers.

They have put it up to Greek prime minister George Papandreou to finally seize the initiative. Whether he can is open to question, but the clear threat now is that other more radical solutions may be brought to bear if he doesn’t. The wrench tightens.

Going Dutch: What proposed sanctions would involve

DUTCH PRIME minister Mark Rutte and finance minister Jan Kees de Jager have called for gradually tougher sanctions on countries that systematically infringe budgetary rules. Their proposals include, in increasing order of severity:

* Appointment of a commissioner for budgetary discipline to independently supervise the process, with powers at least comparable to those of the competition commissioner, including the authority to set requirements for the budgetary policy of countries that run excessive deficits;

* Requiring countries that fail to meet budgetary rules to make adjustments to their public finances;

* In cases where results are insufficient, forcing countries to take measures to put finances in order, for example by raising additional tax revenue;

* Imposing sanctions such as reduced payments from the European Union Cohesion and Structural Funds, or seeking higher contributions to the EU budget;

* Preventive supervision, under which a country’s budget would have to be approved by the commissioner before it could be presented to parliament;

* Suspension of a member state’s voting rights;

* And for countries not wanting to submit to this regime, a choice to leave the euro zone. The ultimate sanction could be to force countries to leave the euro.

The ministers said: “An agreement is an agreement. From now on we must prevent countries from violating the rules with impunity and leaving other countries, which do observe the rules, to foot the bill.”