Greece's decision to return to the ballot box in the search fora government unleashed a hazardous new phase in Europe's debtcrisis, with German Finance Minister Wolfgang Schaeuble calling thevote a referendum on whether the country stays in the euro.

Post-election attempts to form a ruling coalition in Athensbroke down today after nine days, sending Greeks back to the pollsnext month with surveys giving the lead to an anti-bailout partythat would tear up the conditions attached to 240 billion euros($307 billion) of aid.

“If Greece — and this is the will of the great majority — wantsto stay in the euro, then they have to accept the conditions,”Schaeuble told reporters at a meeting of European finance ministersin Brussels. “Otherwise it isn't possible. No responsible candidatecan hide that from the electorate.”

The euro tumbled to a four-month low, European stocks droppedand investors sought the safety of German bonds amid speculationthat Greece would be forced out and pull other countries with it,doing untold damage to the European financial system.

The Greek quagmire raised the tension for a meeting in Berlintonight between German Chancellor Angela Merkel, the dominantfigure in euro crisis management, and Francois Hollande, who tookoffice as French president today in the first power shift to theSocialists in France since 1981.

Hollande, who replaces Nicolas Sarkozy on the French side of theBerlin-Paris tandem, campaigned against the austerity policies thatMerkel championed as the solution to the crisis. Now, in his firsthours in a government post, he will confront questions about hisstance on Greece as more than two years of crisis containmentthreaten to come unglued.

As in early 2010 when the first Greek bailout and broader rescuefund were improvised, the way forward will be charted by toppolitical leaders. Their next summit is May 23 in Brussels, the18th since the debt crisis erupted.

“What's at stake isn't just the next Greek government,” GermanForeign Minister Guido Westerwelle said in an e-mailed statement.“What's at stake is the Greek people's commitment to Europe and theeuro.”

Policy makers gave an inkling of the behind-the-scenes planningto cope with a Greek departure, which would send shockwaves throughthe European banking system and leave lenders to Greece'sgovernment, businesses and households unsure of getting their moneyback.

'Technically Prepared'

The International Monetary Fund has “to be technically preparedfor anything,” IMF Managing Director Christine Lagarde, who startedthe crisis as French finance minister, told France24television.

The once-taboo issue of a Greek withdrawal or expulsion from the17-nation currency union burst into the public debate last week,starting in Germany, Europe's biggest economy and the country thatinvented the euro's low-debt rules.

European Central Bank officials including Patrick Honohan ofIreland and Luc Coene of Belgium weighed the arguments for andagainst a euro exit, adding to speculation that a currency designedto last forever might start splintering after 13 years.

EU treaties declare the euro “irrevocable” and provide no exitprocedure. A December 2009 study by the ECB's legal departmentdeemed an ouster or departure “so challenging, conceptually,legally and practically, that its likelihood is close to zero.”

Hints from euro finance ministers late yesterday that Greecemight get more time to meet budget-cut targets failed to encouragethe feuding political parties in Athens to put together a unitygovernment.

“Nobody was mentioning an exit of Greece from the euro area,”Luxembourg Prime Minister Jean-Claude Juncker said last night afterchairing the meeting of euro finance ministers. “I don't envisage,not even for one second, Greece leaving the euro area. This isnonsense, this is propaganda.”

Less than a day later, Alexis Tsipras, head of Greece's Syrizaparty, counted on using his second-place finish in the May 6election as a springboard to winning the Greek revote and shreddingthe bailout terms.

Greece's economy has shrunk every year since 2008 and is likelyto contract 4.7 percent in 2013, according to EU forecasts. Greekunemployment will reach 19.7 percent in 2012, the second-highest inEurope after Spain, the EU predicted last week.

Tsipras called for a “definitive end” to the bailout and vowedthat the new elections will “permanently lock the old powers in thecloset.”

Bloomberg News

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