Jonathan Eyal, Europe Correspondent In London

Pending Greek drama over austerity and euro zone

What's in store for Greece if the far-left movement Syriza wins the Jan 25 election, as appears increasingly likely? The answer: An end to austerity policies but staying within the euro zone to take advantage of cheap lending from European institutions. This makes the prospect of a "Grexit" - a Greek exit - from the euro less likely.

This year did not begin well for the European Union: Its euro single currency nosedived to its lowest level this decade, and it now risks the imminent revival of the "Greek problem" which brought Europe to the brink of financial ruin five years ago.

The Greeks are back in the news because of a national general election scheduled for Jan 25. According to opinion polls, the front-runner in these ballots is Mr Alexis Tsipras, the youthful, inexperienced leader of Syriza, a far left-wing populist movement founded with the objective of repudiating the country's international financial obligations.

Threat to end austerity

Mr Tsipras has already made his plans clear: Were he to become prime minister on the night of Jan 25, he will end the austerity policies imposed on his country in return for the bailout funds which Europe gave Greece, and terminate the supervision imposed on the Greek economy by the hated "troika" of the European Central Bank, the European Commission and the International Monetary Fund (IMF).

That prospect alone has already spooked investors. Curiously, however, at the EU's headquarters in Brussels, nobody appears to be panicking.

But much of this official facade of calm is artificial for, in private, all European governments worry that any defiance from Greece could shake the euro to its foundations.

The story of Greece is a classic example of what happens to any nation when it is badly governed.

For over the past half century, few countries in Europe had as many opportunities as Greece, and few squandered them so comprehensively.

Greece was the first country from the poor south-eastern Europe to be admitted into the European Union, largely because of its historic appeal as the nation which invented the word "democracy".

Since then, subsidies or grants from the EU accounted for up to 3 per cent of Greece's gross domestic product (GDP) yearly; all told, between 1989 when the Cold War ended and the onset of the financial crisis in 2007, the Greeks got about €50 billion (S$79 billion) in non-repayable grants.

And the extra money given to Greece over the past five years just to avoid bankruptcy is equally staggering: The country got €53 billion in fresh loans from other European nations, €142 billion from a specially established European Stability Fund and an additional €31.8 billion from the IMF.

And that's on top of the money private investors lost when they sold their Greek debts; altogether, the Greeks may have burnt their way through approximately €380 billion of other people's cash.

All that the Europeans have insisted is that their fresh cash should not be frittered away, by forcing Greece to undergo the necessary reforms.

Of course, that meant terrible suffering. The Greek economy contracted by an astonishing 27 per cent. When the crisis erupted, Greece's national debt was equivalent to 120 per cent of the country's GDP; today, that figure stands at 175 per cent.

Unemployment is still at 25 per cent of the labour force. Nor is the country solvent: It is still expecting €7 billion this year from the IMF, plus €3.6 billion from the EU, and still has no hope of borrowing on open markets.

Ironically, talk of Greece abandoning the path of austerity and economic reform is taking place just as the austerity is beginning to bear fruit: The Greek economy is predicted to grow by 3 per cent this year. And just as ironically, the elections are taking place only because Greek politicians remain irresponsible: They failed to agree on the election of a new president, thereby triggering fresh ballots.

Since patience with Greece among European governments is wearing thin, many are suggesting that, if the populist Syriza wins the elections next week, the Greeks should be cut off from further EU money, default and be kicked out of the euro.

Out of euro zone?

That is now far easier than before. More than 90 per cent of Greek debt is now held by other EU governments; the risk that a Greek default will bring down European banks is almost nil. Europe has about half a billion euro in special funds set aside to prevent a new financial panic. And Greece is equivalent to just 1 per cent of Europe's overall GDP, so what happens to it is largely irrelevant.

Indeed, some are arguing that the potential eviction of Greece from the euro will actually force other nations to behave responsibly: "If the weakest link in the chain were to break, the chain would be strengthened", is how Der Spiegel, Germany's influential news magazine, put it in a recent editorial.

But that's a rather glib, simplistic way of looking at Europe's predicament.

To start with, there is no mechanism for kicking the Greeks out of the euro, and the Greeks are unlikely to oblige by asking to leave.

In fact, a majority of Greeks want to stay in the euro because they know that, if they were kicked out, a newly introduced national currency would sink in one day, pulverising whatever savings they have.

Even the bosses of Greece's tourism industry who may stand to benefit from a "soft" national currency which would attract tourists reject that option: "That will mean utter poverty for ordinary Greeks, and who would want to come to our country to see people rummaging through dustbins?" asks Mr Yannis Retsos, president of the association of Greek hoteliers.

It is therefore virtually certain that if a populist government comes to power in Greece, it will merely refuse to pay the price for austerity, but still demand the right to remain within Europe's single currency zone, a sort of "have your cake and eat it" approach for which Greek politicians are famous.

Greece can still be evicted from the euro in literally minutes: The moment it is cut off from EU credit, it will simply be forced to default. But the decision to do so is purely political and only Germany can make it, since no one else in Europe is either willing to take such a risk or has the desire to do so.

And the risks are still substantial.

However much European leaders may argue that Greece is a unique case, investors worldwide will conclude that, if one country can be kicked out of the euro, so can others; the extra interest rate they would demand to lend money to other nations with fragile finances such as Italy, Spain or France will increase, thereby providing a bigger shock to the EU system. The European Central Bank, scheduled to announce next week broader measures to kick-start growth in the EU, will see these negated almost instantly.

The Greek eviction from the euro zone will also be messy but a resentful Greece will still remain a member of the EU, so it will cause trouble for years to come.

And Germany will be transformed from saviour to Europe's monster, reviled and feared by poorer EU countries.

In short, while the risk from Greece a few years ago was economic, today it is purely political but the political risks are very significant.

For all these reasons, European governments are still hoping that they will be saved from their predicament either because the current Greek leaders stage a last-minute electoral comeback and retain power, or because the populist Syriza will not have a parliamentary majority, and will therefore be forced to continue with the current painful economic reforms.

But even if this were to happen, the underlining message from the current crisis is grave for Europe.

The emergence of Syriza in Greece is a manifestation of a broader trend, of a rejection of the policy of austerity throughout Europe, and of the flight of the European electorate away from established, hitherto mainstream parties. This phenomenon is clear in most European countries but particularly in Italy, Spain and France.

Furthermore, even if nothing changes in Greece, Europe will remain locked in the absurd position of lending money to Greece, so that the Greeks have enough to pay back their debts to Europe without ever having a realistic prospect of repaying the entire sum. It is the kind of vicious circle not even the most perverted mind could have invented.

More importantly, the difference between the poorer south of Europe and the richer north - the sort of economic gap which the euro was meant to close - is actually getting wider. Spain, Italy, Greece and Portugal owe non-Europeans a combined €1.85 trillion, compared with €875 billion a decade ago, while Germany and the wealthier northern creditor nations have boosted their assets from €343 billion 10 years ago, to a stupendous €2.36 trillion at the end of last year.

Greece may not baulk at such gaps but other European nations surely will.

So, even if the euro survives the current troubles in Greece, it has yet to defeat all the threats, and yet to prove itself as Europe's immutable and irreversible currency.