How to eject the Greeks from the eurozone, gracefully

MAKE-OR-BREAK summits to rescue the euro follow each other with such bewildering rapidity these days that it is hard to tell when one ends and the next one starts.

The week before last it was Brussels, last week it was the G20 in Cannes. Next week? With the Eurozone rapidly running out of road, even its summit-addled leaders must realise that there is not much point in reconvening until they have something new to say.

At Cannes, the summit host, President Sarkozy, brightly suggested that the rising economies of the east might help rescue the euro. It sounded desperate and it was. Why should India and China, hundreds of millions of whose citizens still subsist at a level far below that enjoyed by the poorest European, save the single currency when the countries that use it are unwilling to put their own house in order?

As this column has remarked before, not only are the problems of the euro more about politics than economics, they are also self-inflicted. Taken as a whole, the eurozone is not over-indebted, and its trade with the rest of the world shows a modest surplus. If the euro was run as a normal currency, with the European Central Bank acting as a lender of last resort, and there was some form of fiscal transfer union to iron out the economic differences within it, this crisis need never have happened.

All of these flaws have been clear for a long time. The trouble is that none of the eurozone's leading players is strong enough to address them, even if they wanted to.

The Brussels establishment certainly isn't. It has neither the resources nor the political clout. Nor does President Sarkozy. At Cannes, France's diminished role, not just in the G20 but even in Europe, was plain for all to see.

What about Angela Merkel? The German Chancellor is often portrayed as the new master of the continent. But when it comes to the euro her countrymen would rather see it collapse than bend the rules any further to accommodate "sinners". That is what German newspapers and politicians have taken to calling countries like Italy and Greece, which they think should never have been allowed into the eurozone in the first place.

It was this moralistic intransigence that led to stalemate at the G20. Nevertheless, something significant did happen at Cannes, even though it was unintended; following the fracas over the Greek referendum, the assembled leaders finally admitted that a country might leave the single currency. Up to then, suggesting such a thing had been taboo in official circles.

Plenty of Germans (though not in the government) have suggested that one way of sorting the euro mess out might be for Germany itself to leave. Much more likely is that a serious attempt will now be made to eject the Greeks.

But even though they may deserve to be kicked out, it will not be easy. The Greeks do not want to go and there is no legal way of making them. Furthermore, if they do default in a disorderly fashion, as everybody fears, it will cause financial pandemonium. The same goes for the Italians.

To avoid making matters even worse, any exit from the euro will have to be voluntary and adequately cushioned, both for the country that is leaving and for those who hold its debt.

The likeliest way to achieve this would be via the ECB buying in a large proportion of the departing country's outstanding bonds, and providing support for its banks over a transitional period. It is the sort of thing lenders of last resort are supposed to do, and moral hazard could be mitigated if the terms were not unduly generous. As a further safeguard, the ECB could also insist that the departing country undertook not to borrow in euros again for, say, at least 10 years.

It would still be painful, but something on these lines could work. The snag, of course, is that the ECB is not a normal lender of last resort, but a push-me-pull-you of an institution which is not supposed, mainly at Germany's insistence, to buy in its members' bonds.

All of which raises a very big question for Mrs Merkel. If German opinion will not permit her to bend the rules any further to allow the likes of Greece and Italy to remain in the euro, would it allow her more flexibility in order to see the back of them? ·