Greece’s possible exit from the euro area moved to the center of Europe’s debt-crisis debate, with officials beginning to weigh the fallout of a withdrawal even as authorities in Athens struggled to form a government.

Meetings brokered by Greek President Karolos Papoulias are set to continue Monday after Syriza, the largest anti-bailout party, rejected a unity government following last week’s inconclusive elections. The country where the 2 1/2-year-old crisis began moved closer to a new vote, and to the possibility of a euro-area exit that was once a taboo among policy makers.

Greek withdrawal “is not necessarily fatal, but it is not attractive,” European Central Bank Governing Council member Patrick Honohan said in Tallinn on Saturday. An exit was “technically” possible yet would damage the euro, he said. German Finance Minister Wolfgang Schaeuble reiterated in an interview in Sueddeutsche Zeitung that member states seeking to hold the line on austerity for Greece could not force the country to stay. 

The debate between growth and austerity will form the centerpiece of talks tomorrow between the newly installed French President Francois Hollande and German Chancellor Angela Merkel, who has championed an agenda of spending cuts. Euro finance ministers meet Monday and may discuss the international bailout for Greece, as well as the situation in Spain, where the government last week made a fourth attempt to clean up the country’s banks.

The euro-area finance ministers will convene in Brussels at 5 p.m. local time.

The euro dipped below $1.30 last week for the first time since January and bond yields of indebted states rose to new highs, with Spain’s 10-year yield climbing 27 basis points to 6.01 percent.

“Syriza won’t betray the Greek people,” party leader Alexis Tsipras said in a statement yesterday as Papoulias began a final bid to coax parties into a coalition. The failure to form a government has prompted concern that Greece may backtrack on pledges to cut spending as part of the bailout requirements negotiated since May 2010, so foreshadowing a euro withdrawal.

The European Commission isn’t considering easing the terms of the joint bailout for Greece from the EU and the International Monetary Fund, EU spokesman Amadeu Altafaj said, denying a report by Athens-based Real News.

“I’m not aware of any discussions within the commission to grant new provisions, new concessions in the program” for Greece, Altafaj said by phone yesterday.

Europe’s central bankers are discussing the possibility of a Greek departure and how to handle the fallout, Swedish Riksbank Deputy Governor Per Jansson said in an interview.

European Union Economic and Monetary Commissioner Olli Rehn said in Tallinn that the region is “certainly more resilient” to a possible Greek exit than it was two years ago, when the bloc would have been “massively underprepared.”

“I still believe that Greece can stay in the euro and find the way to make sure that it respects its commitments,” Rehn said. “It would be much worse for Greece and Greek citizens, especially for the less well-off Greek citizens, if Greece did leave the euro than for Europe as such. Europe also would suffer, but Greece would suffer more.”

After elections in Greece and France signaled a backlash against the German-led agenda of scaling back spending to battle the debt crisis, officials across the region have re-tuned their rhetoric to emphasize growth and employment.

Hollande, who defeated single-term President Nicolas Sarkozy on May 6 to become the first Socialist president of the Fifth Republic in almost two decades, will tomorrow begin his campaign to shift the focus of crisis-fighting away from austerity.

Confronted with electoral defeat yesterday in Germany’s largest state, Merkel said last week that she’ll welcome Hollande for talks “with open arms.”

“I expect both of them to give a clear signal of commitment to stability of the euro zone of overcoming the sovereign debt crisis,” Peter Altmaier, the deputy floor leader of Merkel’s party, said yesterday on Sky News.

With Hollande among leaders calling for a “growth pact” alongside the German-championed fiscal treaty, euro leaders will look toward a summit dinner in Brussels on May 23.

Investors will also be watching tomorrow when the Greek government is scheduled to repay 436 million euros ($563 million) on a floating-rate note held by investors who shunned its bond-loss accord. An EU official said that the payment decision is up to the government in Athens.

The government in Athens would run out of cash by early July if creditors decided to withhold their next aid payment in reaction to stalling progress in Greece, according to a report last week by Bank of America Merrill Lynch. 

(Bloomberg)