The single currency is an idea at a crossroads. Jean-Claude Trichet is right – for the euro to fulfil its potential there must now be another great leap forward. What is required is fiscal harmonisation. The problem is that unless there is a productivity miracle in Greece and possibly Portugal, then such harmonisation will merely set up a transfer union that will not be tolerated by the bill payers.
So Greece must go. This will a painful and unpredictable process and it must be carried out with considerable skill. The danger is that once dominoes start falling Portugal, Ireland and Spain might be toppled. On the bright side, there is the possibility that the markets would applaud a decisive decision from policymakers. It would make the euro stronger. It is the absence of bold and coordinated action that is currently tearing the region apart.
For the alienated and angry Greek people an exit also make sense. What is being asked of them is not achievable in the kind of time frame expected by their European peers. Structural reform is required on a massive scale but economic growth is a critical prerequisite. Greece needs a new currency to ensure growth.
A devaluation should not be seen as an easy option. The magnitude of the structural reform would remain the same but the duration over which it is achieved would be extended. The need for productivity improvement would not disappear overnight.
One way of ensuring that the process is maintained could be to firmly lock the new currency into a trading band with the euro. Greece would get a one off benefit that would open a window of opportunity to put its house in order. But the clock would then be ticking. If structural reform stopped dead then the benefits of the devaluation would be quickly lost. As a further carrot Athens could also be offered the chance of rejoining the euro at a later date – a development that would once again lower its borrowing costs, though this time legitimately.
With Greece out of triage and in the recovery room, the euro authorities would have the space to address past mistakes by moving forward with fiscal integration. Assuming of course that this is what their electorates really want.
Guy Johnson co-presents Closing Bell on CNBC