Other heavily indebted countries like Italy and Spain carry much more weight, but Greece was always the currency union's Achilles heel.
A stay of execution for Greece makes it Europe's prisoner
After months of tortuous negotiation, the euro-zone countries agreed early on Tuesday morning on a second bailout for Greece. Worth €130 billion (Dh634 billion), the deal averts an imminent debt default and reduces the prospect of a euro implosion that would have sent shock waves through the world economy.
From the outset of the sovereign debt crisis in early 2010, Greece was the epicentre of Europe's economic earthquake. The country's economy represents less than 3 per cent of total euro-zone output, but the sheer scale of Greek indebtedness amounts to national bankruptcy. Other heavily indebted countries like Italy and Spain carry much more weight, but Greece was always the currency union's Achilles heel.
With total liabilities in excess of €350 billion, there was no way Athens could service its debt. Quite how successive Greek governments got away with borrowing the sums they did or why banks and investors agreed to lend to them still beggars belief. To assume that states and markets act rationally is clearly foolish.
If the Greek government opts for a disorderly debt default, the knock-on effects are hard to overstate. With contagion spreading to the rest of the euro-zone periphery that includes Portugal, Ireland, Italy and Spain, banks holding euro-denominated bonds would stop lending to each other.
Compared with the global credit crunch following the demise of Lehman Brothers in 2008, the difference is that today many governments can't afford to bail out their banks again. Thus, forcing Greece out of the common currency would spell disaster for Europe and the rest of the global economy.
That's why European finance ministers and private sector lenders to Greece have struck a deal. If it goes through, €107 billion of Greek debt will be written off. This is an orderly debt default in all but name.
The trouble with the latest debt deal is that it merely grants Greece a stay of execution. Without the bailout, the country could not repay €14.5 billion of debt due on March 20. But the price is yet another heavy dose of austerity that locks the Greek economy into a downwards spiral of debt-deflation, as the draconian spending cuts exacerbate a recession.
Currently, the proportion of debt to national output is close to 160 per cent. In the absence of sustained economic growth, it's hard to see how this ratio will come down to 120 per cent by 2020 as projected in the latest bailout programme - a level that is close to the IMF's goal for long-term debt stability.
With rising energy prices and falling output, Greece may in fact head for a third bailout or indeed for default followed by expulsion from the euro zone. Paradoxically, the debt deal could hasten the much-feared scenario of "Grexit" - in the awkward yet memorable phrasing of Citigroup's chief economist Willem Buiter.
However, there are some signs that the agreement is stabilising both Greece and the euro area. First, private lenders who hold Greek bonds will be offered a "voluntary" swap deal. They are being asked to exchange their old Greek government bonds for new bonds that are worth merely 53.5 per cent of the original investment. That figure could rise to over 70 per cent when longer maturities and lower interest rates are factored into the equation. It is not just taxpayers but also investors who are footing the bill.
Second, public lenders such as the euro-zone governments have agreed not to raise interest rates on their central banks' holdings of Greek debt until 2020. Moreover, any profit on their bonds will go towards reducing the interest rates on their bailout loans to Athens. Greece is finally being allowed to borrow at more sensible interest rates, which helps stabilise its public finances.
This unprecedented restructuring of Greek debt averts a messy default and reduces contagion to other heavily indebted countries in the euro zone, including Belgium that has debts in excess of 130 per cent of national output.
As the pieces of the Greek puzzle fall into place, confidence is returning to the markets - as evinced by strong stock markets and lower interest rates on sovereign bonds. This, coupled with the European Central Bank's recent boost to euro-zone bank liquidity, has begun to ease the financial crisis.
But as the economic outlook gets a little brighter, the social situation looks increasingly bleak. Without economic growth, unemployment, poverty and inequality will continue to soar and erode the social compact on which Europe's democracies rest. Over time that could bring down the whole European project.
As the cradle of democracy, Greece is a symbol for the power of the people and a struggle against corrupt leaders. The latest bailout effectively imposes a foreign diktat that undermines popular, national sovereignty. As early as March, the Greek population could use elections to vote in a government that rejects both the spending cuts and the permanent surveillance of the country by European officials.
Europe needs to balance fiscal prudence with solidarity by committing to fund new investments in productive and employment-generating activities. For example, the EU could bring forward its financial assistance for Greece that is earmarked in the common budget. Prosperous euro-zone countries like Germany could channel more of their foreign investment into Greece and also expand the capacity of the European Investment Bank to co-finance large projects. Europe's debt drama need not end in tragedy.
Adrian Pabst is lecturer in politics at Britain's University of Kent and visiting professor at the Institut d'Etudes Politiques de Lille in France