Greece can slay its financial demons – but will it spare the euro?

by Larry Elliott

Guardian
February 19, 2012

There's a scene in The Lord of the Rings where the wizard Gandalf confronts the Balrog, a hellish monster, on a narrow bridge in the Mines of Moria. The battle ends with Gandalf smiting the bridge with his staff, sending the Balrog plunging into a fathomless abyss.

There's a twist to the tail, however. As the monster falls, one last swish of its whip curls round Gandalf's ankle and drags him down into the pit as well. Views may differ, in the context of the eurozone debt crisis, whether Greece is Gandalf or the Balrog, but one thing is for certain; the risks of mutually assured destruction are high.

Both Greece and the hardline European countries demanding cast-iron assurances that they are not throwing good money after bad in a new €130bn (£108bn) bailout have the potential to shatter what, at best, is a fragile truce. The Greeks might decide they have had a bellyful, and that default and departure from the euro is preferable to endless austerity and the humiliation of colonial status.

The Germans, Austrians, Dutch and Finns could come to the conclusion that Greece is a lost cause, and that nothing politicians in Athens say about their commitment to collecting taxes, cutting spending and reforming the economy can be believed. They might decide, despite all the official statements to the contrary, to chuck Greece out of the single currency.

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