That is the question! Or at least according to how investors have been reacting lately.Growing fear that the inconclusive Greek election earlier this month may have placed the troubled nation on a path towards exiting the euro zone drove stock and commodity markets decidedly lower this month while sending high-grade US dollar bonds up to new highs.Since early April, the ‘risk off’ trade is back on as nervous investors calculate the increasing odds of a euro zone meltdown, or at least a growing possibility that the most wayward fiscal culprit, Greece heads for the door. Up to this point the European Central Bank (ECB) and the International Monetary Fund (IMF) have been walking a financial tightrope of giving Greece just enough funds to pay their bills, but only in exchanging for stern pledges of greater belt tightening or ‘austerity measures’ backed up by Greek leaders agreeing to get their messy fiscal house in order.Much like a spoiled teenager grasping for his weekly allowance money dangled by strict parents, Greece has so far been toeing the line, but the latest election results and rising popularity of the radical left candidate, Alexis Tsipras, are signalling a possible turn.Presently, the leaders of Greece’s two main parties are caught in a hung election while heatedly debating the benefits of staying in the euro zone, a topic which underlies the political deadlock that triggered a second national vote on June 17. The Greek exit from the euro, or 'Grexit' scenario as some are starting to call it, might ultimately be manageable but comes at a very steep price which industry analysts place as high as €225 billion for the EU.Even an orderly Grexit plan is likely to materially damage the entire euro area and further clobber the economically fragile European peripheral countries of Ireland, Portugal, Spain and Italy where investors have been steadily withdrawing funds from bank accounts. A sweeping contagion then has the potential to roil markets worldwide and possibly disrupt the global financial system and international trade for a time as the region becomes even less stable.Whether or not Greece leaves the euro, this latest great debate highlights the three main issues with Europe in general. The first and foremost issue is too much debt. Like the rest of the developed world, European governments are massively indebted and now desperately need to strike a more reasonable balance between assets and liabilities. In the long run, this balance can only be achieved by some combination of higher tax revenues and less government spending. The second issue is growth and how the quasi-socialist euro zone burdened by big government and an inflexible workforce can compete in an increasingly global world while at the same time attempting to implement austerity programmes. And the last, but not least important issue is a lack of defined authority on what powers the European Union and ECB ultimately possess to enforce policy across the member countries.In terms of debt, it is no secret that the world’s largest economies including the Europe, America and Japan are in hock by up to as much or more than their entire national income. Like a man who is already living beyond his means and yet owes a year’s salary on his credit cards, it seems almost impossible that there will ever be a chance of paying it all back.What austerity is designed to do is to balance the budget by cutting back on government spending. The other option is to increase taxes but in the case of Greece where tax evasion is close to a national pastime, these policies are equally unpopular. The irony is that if Greece turns its back on the euro and goes with a own new currency — say the new drachma — the dubious currency would immediately be devalued by up to 75 percent according to experts, thereby causing the cost of imported goods to explode in price. This massive inflationary process would effectively create a broad-based ‘goods tax’ by while simultaneously making up to €100 billion of outstanding Greek liabilities nearly worthless sending ripples throughout the global financial system.The only consolation prize for this scenario is that a devalued currency might boost exports and promote tourism as foreigners see the country as an inexpensive option.The second issue for Greece and by association for the rest of Europe is growth. As of this writing, the Bloomberg consensus forecast for euro zone growth is forecasted to be -0.3 percent GDP for 2012 indicating a mild recession.While economists are agreed on no growth for Europe, a Grexit scenario significantly raises the odds that the fractured region is thrown into a much deeper recession. Recession means higher unemployment, less taxes, etc and the cycle perpetuates itself. Importantly, although Greece is a relatively small economy compared to the rest of Europe, representing less than two percent of the total EU Gross Domestic Product (GDP), the other countries would pay a bigger price. In fact, the ultimate tab could be very expensive as the Greek economy would likely be immediately devastated by banks being closed and trade grinding to a halt.UBS analysts estimate that a Grexit scenario would initially cost the country about 50 percent of its GDP and the knock-on effect for the rest of Europe in absorbing the Greek default would result in a 1.9 percent hit to European GDP.In terms of broader Europe’s growth, a Greek euro exit and the associated debt write offs are likely to have an immediate direct effect on the much larger economies of Spain and Italy which together comprise 21percent of EU GDP. Furthermore, the threat of contagion is likely to be a self-fulfilling prophesy as political leaders with waning creditability would be hard-pressed to create needed confidence as depositors accelerate fund withdrawals from the troubled countries’ banks.With yet another major Greek loan restructuring (Greece would now be paying in devalued new currency units), the pain would be felt across the board with Greek bondholders including most of the large European banks, the International Monetary Fund (IMF), the ECB and private investors. The effects of a widespread contagion are hard to calculate but could be monumental. This threat of further debt restructuring is one main reason that Germany, who still holds most of the purse strings, is fighting to keep them in.Perhaps the most critical challenge facing the Europe at this moment concerns the ultimate power and authority inherent in the ECB and the euro zone’s governing bodies. The euro zone was put together in 1992 by member nations signing the Maastricht Treaty which subsequently led to the creation of the European Union. While the 17 euro zone countries share a common currency and have agreed to certain rules, the region’s troubles are so severe and entrenched at this point that the only choices for moving forward appear to be either increasing the power of the EU and ECB to enforce needed policies or to materially alter the Treaty into a more effective format capable of tackling the present crisis.Famed hedge fund manager, Ray Dalio of Bridgewater Associates recently stated in Barrons magazine: “(Europe) will have to decide whether it wants to create a sufficient central government that has more than a treaty, that has the ability to collect taxes from the whole and the ability to issue debt that obligates the whole, or whether it does not. That is the crux of this issue.”So in the end we are left an economically stalled, highly indebted region struggling with massive fiscal problems which if left unaddressed threaten to seriously impair and retrench one of the world’s largest regional economies and export markets.Concerted efforts of policymakers have been relatively successful in deploying needed damage control up to this point but the future remains quite uncertain. How Europe executes in electing and supporting effective political leaders, educating the increasingly disgruntled populace and empowering a broader European government will likely affect global markets for years to come.To increase the power and authority of the EU and ECB or “not to be” may be the critical question of the day but farther out we need to see more action on Shakespearean Polonius’ advice of “neither a borrower nor lender be.”Bryan Dooley, CFA is a portfolio manager at LOM Asset Management in Bermuda specialising in the areas of portfolio management, investment strategy and quantitative process. He possesses an MBA from the College of William and Mary and has held key positions with progressive financial institutions worldwide throughout a career spanning more than 20 years. He can be contacted at 441-294-7032 or bryan.dooley@lom.com.This commentary is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. The information contained herein, has been compiled from sources believed to be reliable, but no representation or warrant, express or implied, is made by LOM Asset Management Ltd or any of its affiliates or representatives, as to its accuracy, completeness or correctness. Readers should consult with their Investment Advisor if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.