Why Greece will lose Europe's David vs. Goliath fight

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The battle between Greece and the European Union seems to be following the David and Goliath storyline. Little, upstart Greece is David, determined to slay the EU's Goliath, the giant Philistine warrior. In the Old Testament account, David armed only with a staff and sling, fells the well-armed Goliath with a stone to the forehead. Game over; the underdog wins.

On Monday evening in Brussels, Yanis Varoufakis, the combative yet eloquent Greek finance minister, was apparently playing the David role to near perfection. For the second time in five days, he stood down the EU. No, he would not accept the EU's insistence that his economic ruin of a country continue to follow, slavishly, the bailout and austerity programs put in place at the height of the debt crisis. "The only way to solve Greece is to treat us like equals, not a debt colony," he told the media after the talks collapsed.

If the Greek saga is faithful to the Biblical script, Mr. Varoufakis will emerge the victor, in the sense that he would secure a diluted debt and austerity package that would give Greece the fiscal breathing room to repair its social safety net and boost growth. Don't count on it, because this time David has little chance of emerging victorious. For Greece, the timing is all wrong.

Imagine if this battle were happening in 2011 or 2012, when the euro zone was in deep recession, the jobless rate was surging into double-digit territory and mass anti-austerity demonstrations were paralyzing cities on the hard-hit Mediterranean frontier; Athens was besieged by violent riots. It was an open question whether the euro zone would survive the crisis intact.

Now imagine if the Greek government, back then, had threatened to shred its bailout program. The move would have been like threatening to pull the pin on a grenade in a packed elevator. The prospect of Greece's exit from the euro zone would have sent shock waves through the entire continent, potentially turning a recession into an outright depression. And if Greece had left, the two other bailed out countries, Ireland and Portugal, probably would have followed Greece out the door, possibly Italy too – arrivederci euro zone. The threat of the crisis piled on top of a crisis would have given Greece formidable negotiating leverage. No doubt, its demands for austerity-lite would have been met.

Today, Greece's blackmail power is hugely diminished. That's because the euro zone as a whole is in far better shape than it was two or three years ago. The recession is over, unemployment is falling and the dud banks have been recapitalized. A new and permanent bailout fund, the European Stability Mechanism, with up to €500-billion in firepower, is in place. The prospects for growth improved considerably last month, when the European Central Bank launched a €1.1-trillion quantitative easing program. Mix in low energy prices and you have a recipe for steady, if slow, economic revival. Even Italy, the victim of a triple-dip recession, is forecasting growth.

Translation: Greece's ability to inflict severe damage on the euro zone by leaving the euro zone, while far from absent, is vastly diminished.

Investors are reacting accordingly. Since the radical left, anti-austerity Syriza party was elected in Greece on Jan. 25, the European markets outside of Greece have been remarkably calm. On Tuesday, the day after the collapse of the Greek-EU talks in Brussels, the euro, the stock markets and oil prices were all up.

Greece itself was a different story. Greek sovereign bond yields have soared and the Athens bourse and the Greek banks in particular have been getting clobbered, which in itself is another indication of Greece's lack of leverage. The Greek government knows that its banking system lives or dies on ECB funding. If the ECB were to withdraw the so-called Emergency Liquidity Assistance, known as ELA, which it could in the absence of an extended or renewed bailout agreement, the banks could collapse. Already, they are under huge pressure as customers withdraw deposits.

If that were not bad enough, Greece is running out of money. Absent a new support program of some sort after the current euros 175-billion bailout expires on Feb. 28, it faces a repayment crisis as early as March, when it owes euros 1.4-billion to the International Monetary Fund.

Add it all up and it looks like Greece needs the EU more than the EU needs Greece. David and Goliath are on the verge of reversing roles.