Greek Election a Referendum on Its Eurozone Membership

Greece's parliamentary elections on Sunday have effectively become a referendum - will Athens keep its eurozone membership or become the first to quit the 17-nation currency bloc?

It is a simple question, but one with potentially far-reaching implications for Greece, the rest of Europe and the world economy. The Greek government has piled up a mountain of debt over the years, but its European neighbors and the International Monetary Fund have twice bailed out the country, sending it billions of dollars in the last two years. Foreign creditors have eliminated more than half the debt Greece owed them.

But many Greeks are angered at the terms of the rescue packages -- that the government impose far-reaching austerity measures, cut wages and pensions, and eliminate thousands of government jobs. On the other hand, Greece's European neighbors say they will cut off the flow of bailout funds if a new government reneges on the country's earlier austerity pledge.

Greece's fractious political parties were unable to forge a new coalition government after splintered parliamentary elections last month, necessitating the new vote Sunday.

One of the leading candidates to head a new government is Alexis Tsipras, head of the radical left Syriza party who is calling for cancellation of the bailout terms. Surveys show Tsipras running close with conservative leader Antonis Samaras, who supported the austerity measures along with socialist party chief Evangelos Venizelos.

A close vote could leave the parties deadlocked once again, and Greece's continued membership in the euro currency bloc in question. While Greece's economy accounts for just 2 percent of the eurozone economy, some analysts think a default on its financial obligations and a eurozone exit could easily lead to turmoil on world financial markets and a sharp downturn in the U.S. and world economies.

The country's biggest bank, the National Bank of Greece, recently said that a eurozone exit "would lead to a significant drop in living standards for Greek citizens." The bank said Greeks would lose more than half their income and the value of the reinstated drachma would fall 65 percent. The country's already high jobless rate would soar to 34 percent, and inflation would surge to 30 percent.

Despite the dire predictions, Syriza leader Tsipras says the bailout terms are worse for Greeks. He declared this week that the bailout deal "is already in the past" and "will be history for good on Monday."

Yet Tsipras says he wants to keep Greece in the eurozone, but with renegotiated bailout terms. Surveys show 80 percent of Greeks want to stay in the currency union as well.

Numerous European leaders say they want Greece to remain in the eurozone, while adhering to its earlier austerity pledge. But one international finance expert, Andreas Hauskrecht of the Indiana University business school, said he thinks it is almost certain Greece will default and leave the eurozone.

"The reasons are very simple," he said. "Let's take the most optimistic way. They are able to form a government after the election June 17. They are able to hold to their promises on the fiscal side, and they still will default because the Greek economy is shrinking so quickly that the numbers that were the basis for the original plan to cut fiscal deficits are insufficient.

"So basically, they are in a vicious circle, and it's only a question of time until they will have to default," continued Hauskrecht. "The less optimistic say they cannot build a stable government, which is much more likely, and then they will default already in July 2012."

Hauskrecht, like the National Bank of Greece, says a eurozone departure will not produce better times for Greeks.

“Greece for me looks almost like a failed state, with all the categories that we have for failed states," he said. "So basically, there is no government structure left. There is very irresponsible behavior from the different power groups in the society, and they are basically digging the hole deeper and deeper every month. We will have [significant] wealth losses, [significant] losses and decline in the further economy. They’ll face very, very hard times for the next year. Leaving the euro is the end point of a catastrophic development that went over years. It certainly is not the turning point that will give them wonderful perspective soon.”

Syriza leader Tsipras says it is not in Europe's interest to force Greece out of the eurozone. He said that if one of the 17 countries is "brought to collapse ... the fire will become unquenchable" - and will result in the eurozone's demise.

Some information for this report was provided by AP, AFP and Reuters.