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How extraordinary and unexpected are the twists and turns of history! Greece is renown as the seat of a brilliantly successful ancient civilisation, but these days for little else apart from corruption and tourism. According the CIA Yearbook*, Greece is the world’s 41st biggest economy, about the size of Vietnam and Bangladesh.

So five or ten years ago, who could have predicted that the eyes of the whole world, including the presidents and prime ministers attending the G20 summit in Mexico, would have been focused so intently on the results of the general election in Greece? Who would have predicted that the result of that election in this insignificant country had the potential to destroy the world’s second most important currency, and potentially plunge the world into depression as its banking systems collapse?

The eagerly-anticipated news is now out. The Greek electorate has pulled back from the abyss. In the second Greek general election in six weeks, the pro-austerity centre-right New Democracy party led by Antonis Samaras scraped a narrow victory over the anti-austerity opposition.

The verdict of the markets was swift and predictable. There was a relief rally on Monday morning that lasted less than one hour.

The vote solves nothing. Nor does today’s news that Mr Samaras has succeeded in finding a coalition partner so that a government can be formed. All it does is buys a bit of time.

So far as we can see, there is no realistic possibility that any Greek government could ever comply with the terms of the bail-out agreement. While the German electorate may feel that austerity is richly deserved nasty medicine for the Greeks, the plain fact is that austerity cannot cure the Greek malaise. The side effects of austerity are truly toxic. At best, they will postpone the patients rehabilitation for years. At worst, they will kill the patient.

Greece is already melting down as a functioning state. Unemployment is soaring; wages and pensions are plunging – and are often paid late or not at all; many families are struggling even to feed themselves – hence the spread of soup kitchens; pharmacies are not supplying expensive medication because they know that the government doesn’t have the finances to reimburse them, law and order is breaking down… and all this is before the second bail-out comes into effect.

That bail-out, agreed in February,  is conditional upon Greece implementing a whole new raft of austerity measures, thus intensifying this Greek tragedy.  Yet without the bail-out, Greece is just weeks away from running out of money to pay its own employees – including doctors and nurses, the police and the armed forces,

We really hope we’re wrong, but we can see a realistic possibility of the thin veneer of civilisation breaking down completely, especially in Athens, as the people say “enough!” and vent their outrage.

It’s one helluva crisis. And yet… if Europe’s hand was forced, it could solve the crisis in several different ways, not least kicking Greece out of the euro. It would be something resembling the end of the world for Greece, but it wouldn’t be the end of the world for the EU, the euro or the global economy.

In reality, Greece isn’t the biggest economic crisis in town. While the eyes of the politicians and headline writers have been focused on Athens, the market has its sights on something much bigger: Spain. If Spain needs to be bailed out, there really is a huge risk that the euro will collapse, plunging the global economy into depression.

Watch this space.

Guest blog post by Trendwatch Asset Management

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