BRUSSELS Senior EU officials are speaking privately about a dangerous new phase in the two-year-old euro zone crisis. Greece - the spark for the conflagration - is close to intractable and Italy, the region's third largest economy and biggest bond market, is cause of grave concern.
Dutch Prime Minister Mark Rutte provided perhaps the clearest indication yet that Greece's 10-year euro membership might not be forever, outlining on Wednesday a plan under which a member state could leave the currency bloc if it consistently and repeatedly ignored budget deficit and other obligations.
"Countries which are not prepared to be placed under administratorship can choose to use the possibility to leave the euro zone," he and his finance and economics ministers wrote in a proposal sent to the Dutch parliament, although it did not mention Greece or any other member state by name.
In whispers, some officials are giving a stark assessment, even if they do not yet represent the mainstream of EU thinking, where many still talk about a solution being found.
"I think the euro zone is on the verge of collapse," said one senior official involved in analyzing solutions to the crisis.
"Italy is the only country that matters now. Forget about Greece. Even if you could find a way to get Greece out of the euro zone, it wouldn't resolve the Italian problem and it wouldn't resolve the debt crisis."
From the European Commission's point of view, a country leaving the currency bloc is not only not being debated, it is not even possible, with the statutes that govern membership making no provision for members to leave the club.
"Neither exit nor expulsion from the euro area is possible according to the Lisbon treaty under which participation in the euro is irrevocable," the Commission's spokesman on economic and monetary affairs, Amadeu Altafaj, said on Thursday.
As one senior EU official put it succinctly: "The euro zone is not a cafe where you go in and you go out. The financial and monetary interdependence is so big, so strong... that the fate of one member creates problems for all of the others."
SHOULD I STAY OR SHOULD I GO
That said, however, the options available for resolving the situation in Greece, where deficit-cutting measures and other EU/IMF-imposed targets have consistently been missed, are rapidly narrowing. And as they narrow, impatience grows.
If Greece fails to deliver on its obligations, which include raising 5 billion euros from privatizations this year, the EU and IMF have said they will not be able to release more aid to the country, which has already received one 110-billion-euro EU/IMF bailout and is expected to receive another of the same size soon.
At that point, if it were to have no further lifelines, Greece may find itself with no choice other than to consider the unthinkable -- defaulting on its debts, renouncing the euro, reintroducing the drachma at a deeply discounted rate and attempting to stimulate a recovery via a painful devaluation.
Greek debt owned by private sector investors and the European Central Bank would be marked down by 50 percent or more, with the reverberations felt from Brussels to Beijing.
"Ladies and gentlemen, the situation is serious in Greece," German finance minister Wolfgang Schaeuble , who has been at the heart of trying to resolve the crisis for the past two years, stated simply as he began a speech to Germany's Bundestag on Thursday.
"At the moment the troika (EU/IMF/ECB) mission is suspended. There can be no illusions here. As long as this mission cannot confirm that Greece has fulfilled the conditions, then the next aid tranche cannot be paid. There is no wiggle room here."
No one is saying it explicitly, but the Catch-22 for Athens would appear to be: "You can't leave the euro zone, but you don't have what it takes to stay in it either."
Private economic analysts have begun to conclude that it is only a matter of time before a way is found to let Greece go.
"We are increasingly of the view that Greece will exit the euro," Mark Burgess, chief investment officer of Threadneedle Investments, which has long been negative on the euro zone during the crisis, said in a research note this week.
"The question is, is it done in a coordinated fashion, accompanied by a state-funded recapitalizing of the banking system, a cut in rates and a massive injection of liquidity, or is it uncoordinated?"
BREAKING UP IS HARD TO DO
Studies on how a country can leave or be forced to leave the euro zone have been done in the past, including a detailed examination by the European Central Bank in December 2009, which concluded that unilateral withdrawal from the euro would not be inconceivable, although it would also mean exit from the EU.
While a country might be able to find the legal grounds to quit the euro and the EU of its own accord, it wouldn't be so possible for the euro zone or the EU to force a member out.
"Expulsion from either the EU or Economic and Monetary Union would be so challenging, conceptually, legally and practically, that its likelihood is close to zero," the paper said.
That means that even if the rest of the euro zone were to decide Athens is no longer a viable member, they would be stuck with it for as long as Greece wants to stay in the club.
In that respect, those concerned about Greece's ability to meet its obligations and worried about its threat to euro-zone integrity may be better off focusing their attention on bigger issues threatening to fracture the bloc, such as Italy's debt problems and the ramifications of a potential default by Rome.
With a sovereign bond market worth around 1.9 trillion euros -- 120 percent of GDP -- Italy is a heavy weight at the heart of Europe. Around 45 percent of its debts are held abroad, with many European banks and sovereigns major creditors.
"If Italy defaults, nearly every bank in Europe would feel the impact or go bust, either because they own debt or they are counterparties to debt," said the official involved in analyzing the ramifications of the debt crisis.
"Italy is too big to save and too big to fail. If the ECB stops buying Italian bonds, then we're really in trouble and no one will be thinking about the problems with Greece."