Sunday's inconclusive election in Greece again raises the question of it leaving the euro but what would that mean, asks ARTHUR BEESLEYin Brussels

GREEK LEADERS are struggling to form a coherent government in the wake of an inconclusive election in which anti-bailout parties took the most votes. With the prospect of a second poll in the balance, the country’s membership of the euro is in question again.

For Greece and the wider euro zone, this is an especially difficult debate, with numerous imponderables to consider.

The starting point, however, is the fact that the election last Sunday has severely set back the EU/IMF plan for the country.

The flipside of the progress by radical anti-bailout parties was a collapse in support for the only two parties backing the bailout: the conservative New Democracy and the socialist Pasok party.

This was a political earthquake akin to Fianna Fáil’s disastrous showing the last Irish election. Pasok and New Democracy have dominated Greek politics since the restoration of democracy in 1974.

A central question now is whether the formation of a Greek government resolved to stick to the bailout is at all feasible. Although a positive signal from Pasok leader Evangelos Venizelos, last night, suggests all is not lost.

In the background is Europe’s unwavering insistence that the fundamental terms of the bailout will not be changed.

If Greece does not meet its part of the bargain, it is said, Europe insists it will not provide rescue loans.

Officials say there may yet be some flexibility on the “outer margins” of deal but the core of the memorandum of understanding with the troika is “non-negotiable”.

Any withdrawal of external aid would carry the clear threat of an unplanned sovereign default, leading inexorably to the adoption of a new currency as the state tries to maintain civil servants’ pay and meet obligations to local suppliers.

This is highly risky stuff with the potential to destabilise the entire euro zone and create social chaos in Greece. There would be risk everywhere in such a scenario. The question naturally arises as to whether Europe would open that door at all.

On one side of the argument is a feeling that the rescue of Greece seems increasingly futile. The original, unsuccessful, bailout was marked by profound political difficulty as the former Pasok-led government missed deadline after deadline as it struggled to meet onerous targets.

It was scarcely any different when New Democracy joined an interim “technical” coalition with Pasok to negotiate the second bailout with the troika.

Even if the pro-bailout parties do manage to achieve a parliamentary majority and avoid a second election, the posting of permanent troika inspectors to monitor the rescue pact in Athens said much about Europe’s lack of confidence in the local authorities.

The election result has prompted considerable nervousness in Brussels and beyond. Still, high-level European officials insist Greek leaders remain in election mode and that a proper assessment of their willingness to implement the deal or not is not possible until a government is actually formed.

So the notion of the country leaving the euro is held to be a matter of idle speculation. Europe still wants the Greeks to do the business as planned.

“If you want to encapsulate it in a few words, it is solidity for solidarity or solidarity for solidity, and that is the essence for the adjustment programme,” says an EU official.

“I see no appetite for exit on the part of Greece and I see no appetite for exit on the part of the 16 other countries.”

There may be no hunger for departure but there is still no hiding Europe’s frustration with Greek leaders.

Although the election has brought anti-bailout firebrands such as hard-left Syriza leader Alexis Tsipra to the fore, many in the European bureaucracy feel New Democracy leader Antonis Samaras and Venizelos were architects of their own demise.

The question of Greece leaving the euro is hardly a new one. At the level of EU leaders it was first raised in open debate by outgoing Dutch premier Mark Rutte last September. Only weeks followed before German chancellor Angela Merkel and the then French president Nicolas Sarkozy chimed in along similar lines.

Whatever the outcome of the current round of politicking in Athens, this question is unlikely to go away. At the raw technical level, the thinking goes that any political system capable of introducing a multi-country currency like the euro should have no problem bringing in new drachmas for Greece.

But this is not about technicalities. It is more about economic and political risks – and these are quite considerable. Not only would there be a danger of bank runs in Greece and other weakened countries; the destabilising effect of one country’s departure could prompt speculative attacks on others. Would Ireland be immune in such a case? Hardly.

There is also no legal mechanism for any country to leave the euro. In a 2009 working paper, the legal counsel to the European Central Bank said that a member state’s departure from the single currency “without a parallel withdrawal from the EU would be legally inconceivable”. In short, new laws would have to be written to bring this about.

But it’s not really about the law. According to Swiss bank UBS, an exit could result in the Greek economy losing up to half its output in a year. “Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade,” said UBS analysts Stephane Deo and Paul Donovan in a research paper.

“There is little prospect of devaluation offering much assistance. We estimate that a weak euro country leaving the euro would incur a cost of around €9,500 to €11,500 per person in the exiting country during the first year. That cost would then probably amount to €3,000 to €4,000 per person per year over subsequent years.”

They also noted that no modern currency union has broken up without some form of authoritarian or military government, or civil war.

All of this explains why Europe still insists on the bailout course, difficult as it is, as the lesser evil. The outcome of Sunday’s election suggests most Greeks are not inclined to believe it. The saga continues.

This is highly risky stuff with the potential to destabilise the entire euro zone and create social chaos in Greece