THE night before the Greek elections, Athens exploded in joy. The Greek national team had won an unexpected victory at the European football championships. In the next round, with delicious symbolism, Greece will play Germany. The main significance of the Greek elections, however, is that it actually avoids the need for a showdown between Greece and Germany. A clear victory for the far-left Syriza party might have provoked a crisis, by nullifying the Greek bail-out deal. Under a centrist coalition, Greece will probably cut a deal that allows the country to stay in the euro and to limp on with a modified austerity programme. The financial version of the Greece-Germany match will therefore go into extra time - with the hope that both sides will ultimately settle for a face-saving draw.
But a respite in the Greek part of the euro crisis does not mean that Europe is off the hook. On the contrary, it is increasingly clear that Greece is no longer at the centre of the problem. The fate of the euro will be decided in Spain and, above all, Italy.
Europe should be using the brief respite brought by the Greek elections to rethink its whole approach to the euro crisis. At present, the debate is stuck. Politicians, particularly in Germany, are being urged to take dramatic steps towards banking, fiscal and political union to save the single currency.
They respond - correctly - that the political and diplomatic conditions are simply not in place to make such a leap. However, in the meantime, they face a rolling pan-European financial crisis that promises to make larger and larger demands on their national budgets. If Europe cannot solve this problem by pressing forwards towards political union, it needs to think much more seriously about how to go backwards - and to return to national currencies.
For the moment, however, European leaders are still concentrating on staving off the evil moment, when this problem has to be confronted. This attitude means that a break-up of the euro precipitated by Greece was always unlikely, because it would essentially be a voluntary crisis. The European Union (EU) has the money to keep Greece in the single currency, if it wants to. By contrast, if both Spain and Italy are unable to fund themselves through the markets, the EU may simply be unable to assemble a bail-out fund large enough to save them. At that point, the break-up of the euro becomes likely.
The most significant event in the euro crisis over the past seven days was, therefore, not the Greek election but the failure of the bail-out of the Spanish banks the previous weekend. The Europeans thought they had exceeded market expectations by coming up with ?100bn. In fact, the yield on Spanish bonds actually rose after the bail-out was announced. Investors seem to have concluded that if Spain cannot borrow directly to bail out its banks, it is perilously close to losing access to the markets completely.
That raises the prospect that Spain might need a full sovereign bail-out, which could cost ?500bn or more - burning through almost the entire financial firewall that the EU has constructed to contain the crisis. And where would that leave Italy? The Italian budget deficit is now pretty small as a percentage of gross domestic product (GDP). But Italy's total public debt has recently hit a new record of ?1,95-trillion and is more than 120% of GDP. The country must borrow hundreds of billions in the markets this year, simply to roll its debt over.
However the International Monetary Fund (IMF) and the EU may well be unable to mobilise the huge sums of money that Italy - the country with the third-largest debt stock in the world - would need in a bail-out. As a result, the IMF has long believed that it is imperative to maintain Italy's ability to borrow from the markets. But Italian borrowing costs are also creeping up. We are close to the moment when Italy finds that it, too, cannot access the bond markets.
There are those in Germany who still think that a chaotic Greek exit might have a salutary effect on the rest of Europe, by making it clear that there are worse options than controlled austerity. And there are some in the financial world who argue that the direct effects of a "Grexit" would now be limited, because banks have had the time to cut their exposure to Greece. But more cautious voices counsel that the indirect effects of a Greek exit could still be enormous. Once investors see that countries can indeed leave the euro, then they will inevitably reprice risk in other euro-zone countries - intensifying the pressure on Italy and Spain.
For that reason, the European authorities should be grateful that the Greek election has produced an outcome that makes a confrontation less likely. By provoking a showdown in Greece, the EU could easily bring forward the moment when Spain and Italy's situation becomes irretrievable.
Even if you believe, as I do, that the euro will ultimately have to be dismantled, it would be a mistake to provoke the final crisis now. For there is very little sign that the European authorities are even close to working out the least damaging ways of ending the experiment. US President Barack Obama's old formula about the Iraq war could also serve as a motto for Europe's efforts to deal with the euro: "We must be as careful getting out of this, as we were careless getting in." © 2012 The Financial Times Limited