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UPDATE 1-Greece, euro exit and the drummer in the band
* Talk of Greece exit from euro zone gathers pace
* EU treaty says Greece would have to leave EU as well as euro
* Beyond financial fallout, social and political concerns grow
By Luke Baker
BRUSSELS, May 14 (Reuters) - A year ago, it was nearly impossible to get a diplomat in Brussels to talk about the possibility of Greece leaving the euro zone. Now, it's the opening to most conversations.
But while it may have become commonplace to discuss a Greek exit (or Grexit as many economists call it), the practicalities and implications of such a decision are far more complicated and daunting than many outside observers tend to acknowledge.
It's not even clear Greece can leave the common currency. The EU's Lisbon Treaty does not make any such provision - it only considers a country leaving the European Union. And in theory a country cannot be forced out of the bloc - it has to decide of its own accord whether it wants to stay.
Yet even that is not entirely set in stone. Asked whether it was legally possible under the EU treaties to force Greece out of the 27-country union, one euro zone diplomat replied:
"In theory it's not, but it's a bit like the drummer in the band - if the band doesn't like the drummer, there are ways of getting rid of the drummer."
The diplomat added a caveat to the metaphor, however, warning that one should not be flippant, and everyone had to think seriously about the ramifications for the future of Europe.
"I'm saying it may be doable, but in this case it could mean the band breaks up and never plays again."
The tone from the European Commission, the EU's executive, has shifted too.
Only a few weeks ago there would most probably have been no reply if a journalist had asked the chief spokeswoman what would happen if Greece decided to leave the euro zone, and whether the EU was making any contingency plans for such an event.
On Monday, spokeswoman Pia Ahrenhilde-Hansen was asked those questions and replied:
"We wish Greece will remain in the euro and we hope Greece will remain in the euro ... but it must respect its commitments.
"Greece has its future in its own hands and it is really up to Greece to see what the response should be," she said.
Asked about contingencies, she did not rule them out.
"There are many, many questions arising and many questions open about Greece and most answers have to come from Greece and we have to respect the ongoing political process.
"Clearly, the future of Greece is in the euro zone. We are working on that."
Ireland's central bank chief and European Central Bank policymaker, Patrick Honohan, seemed to be ready for Greece to leave, saying at the weekend that a Greek exit would not be pleasant, but it would not be deadly either.
"Technically, it can be managed," he told reporters at a conference in Estonia. "It would be a knock to the confidence for the euro area as a whole ... It is not necessarily fatal, but it is not attractive."
Article 50 of the Lisbon Treaty is the relevant piece of legislation dealing with a country that wants to leave. ()
In essence it says that if such a decision is taken, an agreement would have to be drawn up with the other 26 member states setting out the arrangements for withdrawal. That would have to be approved by a qualified majority of EU countries and backed by the European Parliament.
The rules would appear to leave the decision largely in the hands of the departing country. But when asked if that were the case during a meeting in Brussels last week, German Finance Minister Wolfgang Schaeuble said it was not necessarily so.
According to a source present at the meeting, Schaeuble said contingency plans were being drawn up and indicated that life could be made so unpleasant for Greece that it would be left with no other option but to ask to leave.
That could involve shutting off all Greece's official financing, not just from the euro zone's EFSF bailout fund but from the European Central Bank too. Already there are signs of that sort of pressure being applied to Athens.
Last week, the EFSF agreed to disburse the latest tranche of aid to Greece, a 5.2-billion-euro payment, but retained 1.0 billion of the total, saying it was not immediately necessary.
Diplomats and policymakers are worried, however, that all the loose talk about Greece leaving the euro or the EU is merely increasingly the likelihood of such an eventuality, without taking into account what it would really mean for Europe.
One complaint is that many decisions taken over the past 2-1/2 years have been in the hands of finance ministers and euro zone treasury departments.
Officials in those roles have a tendency to look at the raw numbers - has Greece lowered its budget deficit sufficiently, has it carried out the required degree of pension reform - and not at the broader social and political implications.
"We're in danger of driving a country over the edge without really stopping to think what it could all mean," said a senior official from a euro zone country who is among those exasperated with Greece's efforts to stick to its EU/IMF bailout.
"I'm not hearing sufficient discussion of what this means for Greece as a society, or for peace and security in Europe."
As well as concern about the potential for severe financial and social breakdown in Greece as a result of leaving or being forced out of the euro zone, the official mentioned the risk of unchecked migration, the threat of a rise in right-wing or violent political movements, or even a military coup.
"We are entering into unknown territory and it remains profoundly unclear what actually will happen," said Henry Wilkinson, head of analysis at the Risk Advisory Group.
"I wouldn't overstate it, but I think the big concern out of all of this is that in times of great uncertainty and hardship, more extreme parties tend to find greater resonance with their message."
For now, there appears to be no discussion along those lines. Instead, the focus is on whether Greece will form a new government and whether that government will stick to the terms of the EU/IMF bailout.
Beyond that, finance officials are concentrating on isolating the potential economic fallout if Greece does leave.
"It (a euro exit) is not imagined in the legislation, in the treaties, but things can happen that are not imagined in the treaties," said Ireland's Honohan, leaving open the possibility of Greece leaving or being pushed out of the currency zone.
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