THE BLOG
20/07/2011 19:08 BST | Updated 19/09/2011 06:12 BST

There is One Last Chance to Save The Euro - Suspend Greece

There is only one number you need to know to understand just how much is at stake as the leaders of the euro zone gather on Thursday for yet another attempt to come up with a rescue plan for the euro. Seven.

There is only one number you need to know to understand just how much is at stake as the leaders of the euro zone gather on Thursday for yet another attempt to come up with a rescue plan for the euro. Seven.

Once the yield on a country's ten-year debt - that is, the rate of interest that private investors demand to lend it money for a decade - breaks through 7%, it is effectively insolvent. It can no longer borrow from the bond markets. It will be forced to seek a bail-out from its partners in the single currency.

Spain is now well past 6%. Italy breached that rate briefly on Monday, and is still hovering dangerously close to it. The euro is one percentage point away from a chaotic collapse. One more piece of bad news - a resignation from Silvio Berlusconi's government, perhaps, or a bank collapse in Spain - and the game is up.

The time for dithering and delay is over. The markets are not interested in a plan to talk again in a month's time. They don't need another patched-up solution. And they certainly don't want to hear yet more empty rhetoric about the importance of European solidarity. What the EU's leaders need to do is show that they have the determination to make the tough decisions necessary to keep the single currency going.

Right now, there is only one strategy that is going to keep the single currency from collapse. They should agree on a temporary suspension of Greek membership of the euro. Why? Because if they can't fix Greece, the markets will never be convinced that they can fix anything else.

More than a year has passed now since the Greek crisis erupted - and since the European Union came up with a 'shock'n'awe' package that was supposed to stop the crisis from spreading. And what has happened since then? Ireland has gone bust. Portugal has gone bust. Italy and Spain are on the brink. Greece remains stuck in a deep depression. It would be hard to make a worse mess of it if you had deliberately set out to destroy the euro.

The eurozone now needs, more than anything, a credible plan for Greece. Plan A was for a temporary bail-out, followed up with massive austerity. It isn't working. The pain inflicted on the Greek economy has been massive. Its economy will shrink by another 3% this year. Unemployment has soared to 15.8%, up four percentage points in a single year. The suicide rate is up to 17%. As the economy gets smaller, the government misses its deficit targets, and the EU and the International Monetary Fund demand more cuts. It is the economics of the madhouse.

The truth is, Greece can't survive in the euro right now. The answer? Suspend its membership, and re-introduce the drachma. True, it will be expensive. Greece will still need massive loans to get it though a couple of very tough years. Its banking system will need to be bailed out as well. Some of the main European banks may need help to cope with losses on the money they have lent the country.

But it would be a plan. With its own currency, Greece could devalue sharply. The EU could demand structural reforms in return for the extra loans. A restructured Greek economy could start to emulate its near neighbour Turkey, now growing at 11% annually, and with employment at record levels, a strengthening currency and falling borrowing costs.