Commentary: Greece's Euro Membership Hanging by a Thread

Greece's membership of the euro is hanging by a thread.

Aris Messinis | AFP | Getty Images

While this situation seems to have finally dawned on the country's political elite this week, for most Greeks there is little real understanding of the scale of what is going on around them.

The taxi drivers are striking again over government plans to deregulate their industry, and on Saturday we can expect large scale demonstrations as Prime Minister George Papandreou delivers a speech on the economy in Thessaloniki.

Time may have already run out.

The economic situation is now incredibly grim with the latest figures indicating that this country slipped even deeper into recession during the second quarter (- 7.3 percent y/y).

There is now very little chance that any of the main conditions for international aid will be met. Germany's Finance Minister Wolfgang Schaeuble has said that unless the targets are hit there will be no more money. His word's should not be taken lightly.

No more money means a hard restructuring for Greece and a massive recapitalization of Europe's banks. I suspect that Berlin is not prepared to pull the trigger just yet but it is clear the mood in the Merkel camp has changed.

For the time being though some kind of a fudge will be found to keep the aid coming.

The Troika inspectors will return to next week and some how Athens will conjure up more unachievable cuts to keep them happy.

The inspectors may even take solace in the latest report from the OECD which indicates that Greece can avoid disaster "But [that this] this requires impeccable implementation [of reforms] from the Greek government".

So far the Greeks' implementation has been anything but impeccable. The end will probably come towards the end of the year.

When the Troika return to assess the feasibility of giving Greece its seventh tranche of aid it will be clear to everybody that the situation is out of control. In the meantime there will be a great deal of talk from desperate politicians about a lurch towards greater fiscal integration.

The idea of a eurobond riding to the region's rescue though is misplaced.

The German constitutional court on Wednesday made it very clear that any assumption of liability by Berlin must only come with greater control over other country's economic sovereignty.

This will not be acceptable to the Greek people or even the Italians.

The euro bond debate also misses the point that the initial problem with the euro lay not in its rules but with its membership.

It would have been possible to move towards fiscal integration if the likes of Greece had not been admitted in the first place.