I heard an argument the other day that the high-stakes political poker game being played by Greece’s lenders (EU/ECB/IMF)and the governments that pull their strings is just a way by some to push for the eventual creation of a full-scale European political federation.

The argument suggests that many EU leaders took their boldest step yet towards the creation of a full-scale European political federation a year ago, even bolder than the launch of the single currency in 1999. This was the creation of a huge bailout fund to protect EU nations from the choice then facing debt-laden Greece: go to the EU and IMF for an emergency bailout loan in exchange for sovereignty or face the prospect of bankruptcy. Since then, Ireland and Portugal had little choice but to follow Greece’s path.

One year later, eurozone and wider international fears are growing that the Greek bailout has failed, as many fiscal targets have been missed and few of the essential structural reforms promised in exchange for the 110 billion euro rescue loan have so far been carried out.

To add insult to injury, a series of harsh austerity measures and tax hikes, which have hit low income groups and pensioners the hardest, have simply served to deepen and prolong the recession. All this at a time when unemployment has spiked upwards, the country’s debt dynamics appear to be spiraling out of control and government infighting is leading to paralysis. Important decisions that are desperately needed are not being made, and time is running out fast. Soon, the game will really be over unless a Herculean eleventh hour effort is made by all the key players. But the omens are not good and Greece may simply end up as a chip in the high-stakes European political poker game now in progress.

Even the first phase of Greece’s unrealistically ambitious 50 billion euro privatisation and asset sale plan, which was meant to calm disbelieving international markets, has added fuel to the fire, both at home and abroad.

At home, there has so far been a dismal failure between the government and opposition parties, especially New Democracy, to find consensus or even some common ground on essential reforms. There are concerns that state assets will be sold off cheaply in a desperate bid to raise funds at a time when markets are depressed - though it should be noted that proceeds could be used to buy back government debt in secondary bond markets, also on the cheap. There was even a mischievous call from Hellenic Federation of Enterprises (SEV) Chairman Dimitris Daskalopoulos that the government hold a referendum to get a fresh mandate to proceed with more austerity measures.

Abroad, political infighting has openly broken out between many within the eurozone and the ECB on whether Greece should restructure its debt or be given further financial assistance. There has even been irresponsible talk of a return to the drachma bandied about, abroad and at home, with total disregard to the real catastrophic dangers such a move would have for Greece, the eurozone and beyond.

But the stakes in this European political poker game are very high, with players willing to use any tricks they can.

Power struggle: Greece is caught in the middle of a power struggle that will determine the eurozone’s future. Some of the main players (left to right) include ECB President Jean-Claude Trichet, European Commission President Jose Barroso, German Chancellor Angela Merkel, Greek Prime Minister George Papandreou and French President Nicolas Sarkozy

Dissident German officials are thought to have leaked suggestions to the financial media, including a recent mischievous article in Der Spiegel, scaremongering that Greece could be expelled from the eurozone and return to the drachma, or that Athens will soon default. And indeed, the few private lenders to Greece who have not unloaded their bonds on to the European Central Bank or the EU bailout funds now face a growing possibility of default if action is not taken to again rescue Greece. At the same time, the ECB and the European Commission continue to ridicule any idea of default or restructuring as “unthinkable”, as they did a year ago. Greece also strenuously denies even the thought of restructuring, just as seeking an EU/IMF bailout loan a year ago was repeatedly denied just before it happened.

Either way, Greece needs another international bailout, reportedly up to 60 billion euros, and/or an extension of the maturity of its sovereign debts if a restructuring or default is to be avoided. It seems likely that Greece’s EU partners will eventually come up with fresh funds in exchange for credible guarantees, especially as failure to do so would have worrying implications for Ireland and Portugal. There is a real danger that such a “credit event” would see the contagion spread deeper into the eurozone, this time to the much larger economies of Spain or even Italy. Any Greek debt devaluation (haircut) or default would almost certainly trigger similar events in Ireland and Portugal, while Spain and Italy would be extremely vulnerable if the first three dominoes went down. Also, the total cost to taxpayers in Germany and other creditor countries of supporting Greece, Ireland and Portugal will be much higher than seemed likely last year because last year’s bailout funds were largely spent on repaying private lenders and banks. This could lead to an unraveling of the euro, resulting in a fiscal train crash that would potentially have a greater impact on European and global economies than the collapse of Lehman Brothers in 2008.

However, the political resistance to another round of bailouts is more intense than it was last year, not only in Germany, Finland, Austria and the Netherlands, but also among the debtors. The 2010 bailouts have also whipped up powerful anti-European sentiment in both creditor and debtor countries. While in Greece, Ireland, Portugal and Spain, popular resistance to more austerity measures and further tax rises is likely to intensify - especially if governments keep missing their financial targets despite calls for more belt-tightening. It is also worrying that in Finland, Germany and other creditor countries, xenophobic parties are gaining ground as it becomes apparent that the money lent last year was merely a down payment, leaving the eurozone’s fundamental problems unresolved and their taxpayers potentially staring into a bottomless pit.

The good news, according to some experts, is that the global economy is stronger than it was a year ago and could probably withstand a write-down in government debts, especially if it were carried out in an orderly manner, with EU governments jointly guaranteeing the reduced debts that remained.

But Europe’s politicians and central bankers refuse even to think about debt restructuring and instead are likely to continue lending money to the eurozone bad boys. Apart from the fear of triggering a Lehman-style banking meltdown - a threat that many argue could easily be averted by creating a pan-European financial guarantee fund much smaller than the bailouts now under way - Europe’s central bankers have a vested interest in spreading terror about the very idea of restructuring. The ECB itself is now by far the biggest holder of Greek, Irish and Portuguese bonds and would suffer enormous losses if their value were reduced and could itself face balance sheet depletion unless European governments provided a huge bailout. This would no doubt be forthcoming, but perhaps only at the cost of increasing political influence in the ECB, fuelling the political motivation for tightening the debt noose on the likes of Greece, Ireland and Portugal. By turning these countries into permanent debtors to the ECB and the various EU bailout funds, Brussels and Frankfurt are increasing the power of centralised European institutions at the expense of nation states, as Athens has already found out.

The ECB also opposes any form of Greek debt restructuring, fearing it will lead the country’s banking sector to insolvency and hurt public pension funds, as well as cut into the ECB’s own capital, reduce Greece’s willingness to implement reforms and potentially inflame the crisis in other eurozone periphery countries.

Dog eat dog: Stakes in the European political power poker game are very high, with players willing to use any tricks they can

Anyway, the Eurofederalist argument says that the progression from monetary union to fiscal federalism and ultimately to full-scale political union was predicted by both Eurosceptics and Eurofederalists in 1989 when the single currency was first suggested by Jacques Delors and again in 1999 when the euro was created. For some, the journey from the single currency to full-scale political federalism may be taking a somewhat different route from the one initially expected, but the end destination could well be the same. The question is whether Europe will get to its intended destination before Greek, Irish and Portuguese workers or German and Finnish taxpayers decide that they have been taken for a ride.

In the meantime, it looks as if the stakes in the European political power poker game are set to rise again and it could be very costly for those who are bluffing: let’s hope no-one goes bust.

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