Faith that the Greek crisis can be resolved is collapsing, sparking open talk among euro zone leaders that Athens may be forced to quit the monetary union after more than two years of unrelenting turmoil.
That scenario sent financial markets tumbling Monday, and borrowing costs in countries such as Spain and Italy climbing, as Greece went into a second week with no government despite repeated attempts to cobble together a coalition, pointing toward a second election in mid-June.
The upheaval in Europe – and the concern that it will drag down economic growth – has caused a flight away from risky assets, including commodities. Monday's 206-point loss for the S&P/TSX composite index means the Canadian benchmark has lost 6.5 per cent so far in May, with mining and energy shares leading the way.
The Greeks want to remain in the 17-member euro zone, but without the fiscal handcuffs attached to their costly bailout. The rest of Europe, notably Germany, is demanding austerity, but isn't ready to kick the Greeks out of if they try to rip up the rescue pact.
These fundamental contradictions are at the heart of the ever-deepening euro debt crisis. Neither side is ready for the wrenching global chain reaction that many observers believe is coming: economic devastation for the Greek people, a fractured euro zone and the prospect of financial contagion throughout Europe and beyond.
This weekend marked a turning point of sorts as even euro zone policy makers, who have tried to hold the fragile union together, began to openly speculate on a group that excludes Greece.
"It is looking increasingly as though an exit really is the only way out," said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates in Toronto.
Greece has no intention of living up to its "end of the bargain," he said.
Canada's Finance Minister Jim Flaherty urged the leaders of the euro zone to "show courage," issuing a pointed warning in a CTV interview.
"They have to do the right thing, use some of their taxpayers' money to bail out some of the weaker members of the euro zone – or start moving away from the euro zone and just say this was an experiment that has not worked," Mr. Flaherty said.
Euro zone finance ministers, meeting at a special session in Brussels, pleaded with Greece to live up to the conditions of its €130-billion ($167-billion) bailout and push ahead with spending cuts.
"Everyone who's speculating about a Greek exit from the euro zone is forgetting that this wouldn't change the fundamental problem," Belgian Finance Minister Steven Vanackere told reporters. "A Greek exit would plunge the people even deeper into poverty. This solution wouldn't solve anything."
Dutch Finance Minister Jan Kees De Jager warned that Greece risks "enormous suffering" if it leaves the euro.
"They have to find a way out of the political impasse," he added.
Other European officials, including Eurogroup chairman Jean-Claude Juncker, want to give Greece more time to sort out its political mess and implement tough austerity measures.
Greece and the euro crisis are expected to be at the top of the agenda when German Chancellor Angela Merkel and France's newly elected Socialist President François Hollande meet in Berlin Tuesday. Mr. Hollande was elected on a pledge to temper austerity with economic growth, setting up a possible split with Ms. Merkel, a hardliner on getting Greece and other countries to rein in their spending.
Greece's political deadlock has entered its second week, with politicians unable to forge a coalition government after an election that saw the Greek people hand the balance of power to various anti-bailout parties.
Without a government, Greeks will have to go back to the polls next month. The country could also run out of cash to fund government operations by early June if it doesn't get the next instalment on a massive European bailout.
A return to Greece's old currency, the drachma, would likely mean a sharp devaluation as people trade in their euros, and according to Kit Juckes, Société Générale's head of foreign exchange, trigger a "cataclysmic" 25 to 50 per cent drop in economic activity in the country.
A Greek implosion would have relatively little immediate effect on the global economy.
But a euro zone without Greece would test the ability of European officials to shore up the region's banks, whose balance sheets are loaded up with the bonds of neighbouring countries. A Greek default could collectively cost them hundreds of million euros, testing the strength of a €500-billion euro zone rescue fund – European Financial Stability Facility.
The loss of a euro zone member, however small, would be a significant hit to the reputation of the common currency. Just a few years ago Europeans were touting the euro as a rival to the U.S. dollar as a key global reserve currency.
In Ottawa, the euro got a vote of confidence from the leader of one of Europe's fastest-growing economies. Polish Prime Minister Donald Tusk said the crisis hasn't shaken his commitment to joining the euro.
With files from reporter Campbell Clark in Ottawa and Reuters