ATHENS — The threat of a full economic collapse in Greece escalated Tuesday after warring political factions here failed to forge a new government, triggering fresh elections and heightening chances that this rudderless Mediterranean nation could be forced to abandon the euro.
The political chaos was raising the stakes across Europe, with a showdown now looming between Greece and euro-zone leaders headed by German Chancellor Angela Merkel who have demanded tough belt-tightening from Athens in return for its massive international bailout.
Merkel, in fact, is battling resistance on two fronts to her vision of cuts as the best and only cure for what ails Europe, raising fresh questions about the region’s ability to quell a crisis that has gone on for 21 / 2 years. Francois Hollande — France’s first Socialist president in 17 years — flew from Paris to Berlin on his first day at work Tuesday with a pledge to “renegotiate” a new response to the crisis focusing on economic growth and sounding a more conciliatory note on Greece.
Underscoring rising fears of a messy breakup of the region’s currency union, the euro fell Tuesday while worried investors again drove borrowing costs precariously high for troubled but far larger Italy and Spain. If Greece were to exit the euro zone, the fallout could send those costs to unsustainable levels, raising the prospects of even bigger bailouts to prevent a further rupture of the euro zone.
The fear intensified as Greece, where Europe’s debt crisis began, appeared closer to a moment of truth. The nation’s May 6 elections pummeled political parties that approved the rescue deal, and after 10 days of wrangling, leaders failed Tuesday to forge a unity government that would have worked to forestall collapse and keep Greece in the euro zone.
Instead, a nation in danger of running out of cash to operate the government — and where fearful residents in recent days have been rapidly withdrawing more of their savings from Greek banks — faces uncertain new elections next month. Opinion surveys have shown that Syriza, a party that wants to break the terms of Greece’s bailout deal and that came in a surprise second in the last vote, is polling in first place.
“The Greek people, after the May 6 elections, have declared the bailout null and void,” Syriza leader Alexis Tsipras said after the collapse of talks Tuesday. “We have made the decision not to betray people’s expectations."
European finance ministers — whose taxpayers have largely funded the Greek bailout — were quick to push back Tuesday. Given the potential shock waves if Greece is forced to leave the euro zone, there have been suggestions in recent days that European officials might show more lenience with Athens.
But German Finance Minister Wolfgang Schaeuble played down any shift after a meeting with his peers in Brussels, saying the Greek bailout terms were not up for renegotiation. He added, though, that unspecified bilateral deals might be reached with Athens, such as having the European Union invest in infrastructure projects in Greece to help the country’s economy.
“If Greece, and this is the will of the great majority, wants to stay in the euro, then they have to accept the conditions,” Schaeuble told reporters before leaving Brussels, according to a Bloomberg News report. “Otherwise, it isn’t possible. No responsible candidate can hide that from the electorate.”
The Greeks are riding a wave of resentment across Europe against the austerity prescribed to solve the crisis, with French voters opting for the Socialist Party’s Hollande over conservative incumbent Nicolas Sarkozy. Governments have dramatically cut spending in Greece and other euro-zone members — including Spain, Italy and Ireland — to try to restore investor confidence in nations that drastically overborrowed and overspent during the past decade. But economists increasingly say that the cure is killing the patient, with cuts coming too fast, too soon — running the region’s economies into the ground.
Analysts in Athens, however, say it’s unclear how Greek voters will lean in the coming weeks. Polls show that Greeks overwhelmingly favor keeping the shared currency. But the rigid austerity demanded by Greece’s bailout from the E.U. and International Monetary Fund has sent unemployment soaring to 24 percent and thrown the economy into a brutal, multiyear recession with no end in sight. Effectively, Greek voters want the euro but the not the bailout’s tough terms.
Yet as pressure mounts on Greece to largely abide by the rescue terms or risk ejection from the euro zone, some observers suggest that voters could shift back toward the parties that support the bailout. But even those parties, including New Democracy, which came in first May 6 but fell two seats short of being able to cobble together a working coalition, want to at least renegotiate some of the strictest terms of the agreement.
For Greece, adoption of the euro became a great stabilizing force after years of the topsy-turvy drachma, offering a decade of borrowing rates nearly on par with those of the giant of Europe, Germany.
In the long run, most Greeks still think that staying in the euro zone gives them a chance at monetary stability and at remaining a key part of the vision for an ever-more-integrated Europe. In addition, a return to the drachma or a national currency of any other name would at least initially cause a deep devaluation that could harm living standards even more with high inflation and interest rates.
Warning residents of the tough choice ahead, New Democracy leader Antonis Samaras said Tuesday that “this is the most critical time for the country since the restoration of democracy. Greece is being isolated.”
European officials, led by the Germans, have threatened to pull the plug on Greek’s rescue funds if the nation doesn’t accept deeper cuts. If the spigots of aid are closed, analysts say, Greece could begin to run out of cash by late June or early July. Because Greece is spending more than it takes in from tax revenue, that could quickly make it tougher for the government to cover things including the salaries of public workers and social security checks for the elderly. Eventually, the shortfall could get so bad that Greece might have no choice but to once again start printing a potentially unstable national currency.
Observers say the Europeans, worried that the crisis could keep spreading, are likely to explore every option to avoid what would be the first withdrawal of a nation from the 17-country euro zone. Despite the public stance by Schaeuble, Merkel’s allies in the German Parliament have signaled that they might be willing to offer more flexibility on the interest rates Greece is paying on its emergency loans and on the timing of meeting its targets to cut its gaping budget deficit.
But those changes could potentially raise the cost of keeping Greece afloat, and if Germany needed to commit more money, the relief measures would be subject to parliamentary approval in Berlin — an unsure bet because Germans are becoming more frustrated with Greece’s fiscal tightrope.
“We must do everything we can to help Greece get growth,” Merkel said Monday. “Solidarity for the euro would only end if Greece simply said, ‘We are reneging on the agreement.’ ”
Correspondent Michael Birnbaum in Berlin and special correspondent Elinda Labropoulou in Athens contributed to this report.