The fault-line in the euro-zone has taken a long time to appear, but the  Greek dilemma has now made it unavoidable.   While the country remains locked into euro-land, there only only two ways out, since devaluation is ruled out by the single currency.   One is deflation, the other is default.   The former is being made a lot harder, if not politically impossible, by intense trade union and citizen resistance to mega cuts.   The latter would be pressing the nuclear button since it would likely trigger the unravelling of the euro, with Spain, Portugal and Ireland in the offing.   That’s why at the last minute Germany is now signalling its belated acceptance of loans and loan guarantees to the Greeks.

But that’s not the end of it.   Germany is not going to stand ready to bail out the indisciplined every time they fall on hard times.   That might suggest three possible scenarios:

1    A tighter degree of political union plus a more federal system of tax and spending, with perhaps a European Monetary Fund (shades of the IMF) to oversee EU monetary policy more closely.   But there is no conceivable prospect of such a framework gaining traction at the present time.

2   The exigencies of the single currency for the smaller, weaker countries could be compensated by fiscal transfers from rich to poor, greater support for jobs and low wages, and a much enlarged EU budget to give greater protection in a downturn.   But that would be fiercely resisted by the monetarists – the ECB, the Germans, and the financial markets.

3   The only other option for Greece (or any other EU country on the brink) would be to leave the euro-zone, devalue, restructure its debts, and take the public controls necessary over the banks, utilities, energy, transport and industry to push up productivity and promote jobs and growth.   That may not happen this time round, but sooner or later it’s the inevitable logic of an EU single currency relentlessly enforcing job and pay cuts as the price of membership.

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