It’s been a harrowing couple of weeks for Greece and fellow euro zone members, but they have finally found a 130 billion euro bailout formula that looks set to allow the European sovereign debt crisis to muddle through for the moment.

But the deal comes at high costs, not least of which are relations between Greece and the most hardcore northern members of the euro zone – Germany, the Netherlands and Finland — which have been pushing harsh terms on Greece while arguing the strict measures will bring the best long-term outcome.

In response, Evangelos Venizelos, Greece’s finance minister, complained last week that some euro zone forces want to push Greece out of the group, and accused them of “playing with fire.” With the latest agreement, he now says the euro zone has avoided a “nightmare scenario.” But many critics of the process maintain, as they have at earlier stages, that no permanent solution has been reached and that this agreement, too, will fall apart soon — that is, if Greece does not leave, or does not get pushed out of, the euro zone first.

This thinking won new credence this week when the Financial Times uncovered a “strictly confidential” report, prepared by the International Monetary Fund (IMF) for euro zone officials, that privately acknowledged what critics have been saying publicly for months — that the of austerity measures being imposed on Greece may backfire. The steps could reduce economic growth so drastically that, even in the best-case scenario, it would worsen Greece’s debt woes rather than improve them. Greece’s debt-to-GDP ratio could end up at 160%, rather than the 120% target being touted in public. This would all be accompanied by an economic depression for Greece, which some say is already underway. It does not help that Greece has not met many of its obligations under the last bailout of 110 billion euros in 2010.

If this is the discussion behind the scenes, then it begs the question: What do Germany, the Netherlands, Finland and their supporters really want? Are they attempting to impose such harsh conditions on Greece that it has no choice but to leave the euro zone – a “Grexit” as some now refer to it?

“Probably what the politicians are trying to do is to force the Greeks to leave,” says Wharton finance professor Franklin Allen. “They don’t want to take the blame, and they can then claim it is the Greeks’ fault. They will have a tough time explaining to their taxpayers how they lost so much money.” At the same time, those officials probably still hold some hope that “something will turn up,” Allen adds. “It could work out. I agree with the report, though, on what’s likely to happen.”

The economic numbers are brutal. In Greece’s latest unemployment report, the figure hit nearly 21% (youth unemployment is at 48%), in an economy that has been in recession for some five years. The economy shrank by a further 7% in the fourth quarter of 2011. Projections for 2012 are for a contraction of between 4.8% and 7%. January budget revenues fell by 7% (compared with January of 2011), versus a targeted increase of 8.9%. Tax receipts plummeted by more than 18% for the month.

“The ‘solution’ is unlikely to get Greece out of trouble,” says Mauro Guillen, Wharton management professor, of the latest bailout. “Normally, a debt restructuring and bailout would be accompanied by measures to boost competitiveness. Unfortunately, Greece cannot do so overnight because it cannot devalue its currency — it doesn’t have one. So they are in a bind. If things continue this way, the economy could contract further — that’s the consequence of austerity — and unemployment could be high for a long time.”

Some critics say there are only two ways out of this spiral down: (1) transfer payments – a so-called euro zone-wide fiscal union — from relatively rich northern euro zone members to Greece and other members facing sovereign debt crises (Portugal, Spain, Italy and Ireland); or, (2) a Greek exit from the euro, and creation of the new drachma, which would allow Greece to devalue its new currency and increase competitiveness and productivity.

So, is Greece now better off leaving the euro zone? “In my judgment they are better off to leave,” Allen says. “Quite the best time to do that is an interesting issue. They may want to maximize the amount they can obtain before defaulting and/or achieve primary balance (when a government has more revenues than expenditures, not counting interest paments). Primary balance would certainly be an easier situation in which to undertake the default.”

The latest agreement provides Greece with 130 billion euros and could cut Greece’s debt by some 30%, with bondholders bearing the brunt of it. They will suffer a “haircut” of nominally 53.5%, but that works out to about 74% after accounting for additional adjustments in Greece’s favor. The reductions amount to some 107 billion euros.

Allen, explaining that he has not seen all the final details of the agreement, notes that “at one stage the idea was that the IMF, EFSF (European Financial Stability Facility) and private creditors would have equal priority. If this made it to the final agreement, then the Greeks are in a strong bargaining position. The IMF would, for the first time, be faced with a loss. Since some of their money comes from very poor countries, this would cause a huge problem for them. Greece, with a GDP per head in PPP (purchasing power parity) terms around $28,000, is actually quite a rich country, just behind Spain and Italy in the rankings which are both around $30,000 a head. They really would be taking from the poor to give to the rich.”

Marshall Auerback of Pinetree Capital, who is also an advisor and hedge fund manager for Pimco, the world’s largest bond fund, calls the new agreement “a closet bailout of the bondholders,” because of member demands that Greece, in effect, set up and an escrow account for the bailout funds, upon which foreign creditors receive first priority. He recommends that Greece leave the euro zone and create a new currency that would be devalued by 60% to 70%. This would set the stage for making Greece the “Florida of Europe,” meaning a prime spot for vacationers and retirees that would pump large amounts of capital into the country, Auerback said in an interview on Business News Network.

Certainly Greece would seem to be reaching the breaking point. As Billy Mitchell notes in his blog, Modern Monetary Theory … macroeconomic reality: “On February 12, 2012, the famous Greek composer Mikis Theodorakis wrote an open letter to the international community – THE TRUTH ABOUT GREECE – where he makes the telling point about bankruptcy:

Production has come to a standstill, the unemployment rate has reached 18%, 80,000 shops have closed down, along with thousands of small businesses and hundreds of industries. In total, 432,000 enterprises have shut down. Tens of thousands of young scientists are abandoning the country, which is every day sinking into medieval darkness. Thousands [of] formerly wealthy citizens are scavenging on rubbish heaps and sleeping on the pavement.

In the meantime, we are supposed to be surviving thanks to the magnanimity of our lenders, the Europe of the Banks and the IMF. In reality, every package deal which charges Greece with tens of billions of Euros is repaid in full, while we are burdened with new unbearable interest rates. And since it is necessary to maintain the State, the Hospitals and the Schools, the Troika [the IMF, the European Central Bank and the European Union] is burdening the middle and lower economic strata of society with excessive taxes, leading directly to starvation.

Amid the latest effort in Europe to ward off another systemic financial crisis, Greece looks more likely to drop out of the euro zone than ever, at least temporarily, says Franklin Allen, a Wharton finance professor.

At this week’s European summit, German Chancellor Angela Merkel said the European Union (EU) should be able take over control of Greece’s budget decisions if needed. One Greek newspaper referred to the German proposal as “the document of shame.”

“I think the Greeks are quite right to be outraged at this,” Allen says. “It underlines the real problem in the euro as currently constituted. I think Greece will leave the Euro, perhaps temporarily, and this will de facto become the discipline device.”

On the face of it, the overall risk of a financial system collapse in Europe appears to have been greatly reduced in recent weeks, thanks largely to two developments. First came the Long Term Refinancing Operation (LTRO), which makes $650 billion in new money available to euro zone banks over three years. That has significantly lowered the costs for credit insurance (credit default swaps) – and thus the overall cost of borrowing — for sovereign bond issues by Italy and Spain, at least for now.

The second development came this week with the signing of a new pact imposing stricter fiscal requirements on EU counties more generally. Of the 27 members, only the U.K. and the Czech Republic declined to sign the new treaty.

How much does this new agreement accomplish? “Obviously, Europe and the euro zone need a fiscal compact. But the problem is that it won’t be in place in just a few weeks,” notes Wharton management professor Mauro Guillen. “You need months to years to implement it. But investors and the markets want answers now, not in months or years. So I think it is the right path to eventually take, but it cannot solve the pressing problems of the day.”

Allen further points out that “it does not accomplish much in concrete terms at all. My understanding is that there will be enough ‘get outs’ that it essentially will not force countries to adjust immediately…. The Growth and Stability Pact did not work and this is more of the same.”

Regarding the new money available through the LTRO and the European Central Bank (ECB) in mid-December, Financial Times columnist Martin Wolf writes: “Does this mean the euro zone crisis is over? Absolutely not. The ECB has saved the euro zone from a heart attack. But its members face a long convalescence, made worse by the insistence that fiscal starvation is the right remedy for feeble patients.”

The bottom line, then, as Allen notes, may be Greece’s exit from the euro zone, and there have been some reports that those plans are underway.

This all comes against a challenging background. European unemployment is at its highest level since the euro was created, and the International Monetary Fund (IMF) recently lowered global economic growth estimates substantially, particularly for Europe, compared with forecasts of just three months ago. Many European countries are in recession already. The IMF forecasts a region-wide recession in 2012, with GDP falling by 0.5%, and far more sharply in Italy and Spain.

On balance, it’s a gloomy picture. But what if it’s all just part of a process of controlled chaos?

In the article “The coming resolution of the European crisis,” Fred Bergsten, director of the Peterson Institute for International Economics, and Jacob Funk, a research fellow there, disagree with the widely held view that “policy reactions to the Eurozone crisis are … short-sighted, incoherent, and driven by political expediency.” Instead, the two argue, “what we are seeing is a game of chicken among the key political and economic powers in Europe. As the crash looms ever closer, the right deals will be struck and Europe will emerge stronger and with its currency intact.”

The writers further note that the key to understanding many developments in the euro zone is to look at what “Europeans do rather than what they say. Germany and the ECB will come up with any amount of money needed to prevent a financial collapse of the region,” the article notes. “The problem for the markets is that these central players cannot say that this is what they will do.” Why? First, because committing to unlimited bailouts “would represent the ultimate in ‘political moral hazard’” and would take the pressure off debtor countries to make tough political decisions. Second, according to this view, the four key players — Germany, the ECB, the IMF and private lenders — have essentially been working individually “to impose as many of the financial losses on Greek government bonds or European banks as possible onto the other three.”

The writers further point out that none of the agreements under consideration – no matter how painful – come close to being as “costly for any of the main actors involved, inside or outside the Eurozone, as a sovereign default in Italy and/or collapse of the euro.” Therefore, the argument goes, “once the political pre-positioning is over and the alternatives are exhausted, the games of chicken will end and the political decision on how to split the bill for securing the euro’s survival will be taken.”

Still, as other analysts note, it is quite possible that markets could outrun the speed with which officials could respond to a swift-moving crisis, and the whole project could go off the rails.

Additional reading: Europe’s Money-Go-Round Saves the Day – for Now