The Greek crisis risks triggering a domino effect which would expose the dire budgetary situation in other countries of the eurozone, the group of 16 European Union member states that have the euro as their common currency. The countries most vulnerable are the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain), but France and Belgium also have weak public finances. A strategist of the French bank Société Générale told investors last week to prepare for the inevitable “ultimate denouement: the break-up of the eurozone.”

Last Thursday, a summit meeting of EU leaders in Brussels failed to provide concrete European measures to shore up Greece’s public finances. Apart from being politically difficult, a plan to bail out Greece might also be illegal under the EU Treaties. The think tank Open Europe looked at ten possible options for a bailout and found that only one is unambiguously legal under the Treaties. Former British Chancellor Lord Lamont told the BBC: “I think ultimately it will be a European bailout, but the problem is that is really illegal under the Maastricht Treaty, and they will have to find a way around that.” [audio] An internal report of the Bundestag, the German Parliament, ruled out any form of financing the Greek budget through the European Central Bank (ECB) or national central banks, stating that “a member state is not allowed to guarantee or take over the liabilities of the central government of another state.”

Public opinion in Germany, the strongest economy in Europe, is also unwilling to bail out profligate eurozone members, such as Greece and Spain, who insist on granting their citizens a cornucopia of welfare benefits which the state can no longer afford. Otmar Issing, a former ECB board member, did not mince his words when he told the German paper Welt Am Sonntag, referring to Greece’s generous pension system, that the Greeks had to start living within their means. “One can’t demand help from the outside in order to continue with something like this,” he said.

Germany’s taxpayers agree. A poll by the mass circulation tabloid Bild showed that 67% of the Germans oppose a bailout of Greece with German money. Because a failure to solve Greece’s problems will inevitably drag the euro down, thereby leading to higher inflation in Germany, the Germans offered an alternative to solve the euro crisis: 53% said that Greece should be expelled from the eurozone if it poses a danger to the EU’s currency.

Legally, however, it is impossible to eject a country from the eurozone without ejecting it from the EU altogether – which is legally impossible as well. This creates a catch 22 situation, which the Germans can only solve with a very radical solution: leaving the eurozone themselves. If Berlin were to do this, it would be able to create a new eurozone without the PIIGS countries – a euromarkzone of sorts, with France, the Benelux countries, Finland, Austria and Slovenia. Though no-one is admitting it in public, various economists do not rule out such a scenario.

Exaspiration with the PIIGS could make this scenario a realistic option sooner than one expects. On Monday, following a meeting in Brussels, the finance ministers of the eurozone told Greece that it has to cut back its deficit more rigorously. The ministers said that Athens has to reduce its deficit from 12.7% of GDP to 8.7% this year. They warned that if Greece does not present a plan to do so by March 16 they will “take determined and coordinated measures to safeguard the stability of the eurozone as a whole.” What these measures might be was not disclosed. “We do not feel it would be wise to have a public discussion of such instruments, but if those instruments are called for, then you can take it that we will have those instruments,” Jean-Claude Juncker, the Prime Minister of Luxemburg and the chairman of the eurozone group said.

Greece’s socialist government is resisting pressure from Germany and the ECB for added budget austerity measures – including abolishing the extra month of salary which Greek public sector workers get at Christmas. Greek Prime Minister George Papandreou slammed the EU for not doing enough to help his country “against the perceptions and the psychology of the markets.” He criticized the ECB and the other EU countries – read Germany – for having “created a psychology of looming collapse, that risks becoming self-fulfilling.” He added that Greece has become a “guinea pig in a battle between Europe and the international markets.”

In Spain, another eurozone country where a socialist government is in the bad habit of running huge budget deficits, the newspaper El Pais reported that the intelligence services are investigating the role of British and American media in fomenting “speculative attacks” against the Spanish economy. Spain is the only economy in Western Europe that is still in recession. Clearly Prime Minister Jose Luis Zapatero does not want to take the blame himself.

Meanwhile, in London, there is considerable relief that Britain held on to the pound and refused to adopt the euro ten years ago. “Let us give thanks that we never joined,” Simon Heffer wrote in his column in the London Daily Telegraph. The Centre for Economic and Business Research (CEBR), an independent think tank, calculated that if Tony Blair had taken Britain into the euro, unemployment would presently be around 15%, twice as high as currently, while GDP last year would have fallen by 7 instead of 5%. Because Britain is not in the euro, it has been able to depreciate its currency, lower the cost of labor and restore competitiveness. Mats Persson, the director of the think tank Open Europe, told last Saturday’s Daily Mail: “Even if Greece receives a one-off bailout it would not solve the real problem, which is the huge differences in competitiveness between the eurozone’s richest and poorest members... One thing is clear, Britain made the right choice in staying out.”

While the Greek problem looms over the euro as the sword of Damocles, economic recovery in the eurozone has stagnated. The eurozone economy grew by only 0.1% in the fourth quarter of last year, trailing far behind the US economic growth of 1.4% in the same quarter. In the third quarter of 2009, the eurozone still had a modest growth of 0.4%.