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Fundamental reforms needed to save the euro

Tomorrow, Greeks go to the polls for their second general election in the space of just six weeks. However, regardless of the outcome, Greece's departure from the single currency now seems all but inevitable, with possibly serious consequences for the rest of the eurozone, including Ireland.

Under the idiosyncratic Greek electoral system, which excludes parties securing less than 5pc of the vote and awards a 50-seat bonus to the largest single party, it is possible for a political party to secure close to an overall majority in the 300-seat parliament with not much more than 30pc of the vote.

This means that the centre-right, pro-bailout New Democracy party could well pip the left-wing, anti-bailout Syriza party and win enough seats tomorrow to form a new Greek government -- an outcome that would be warmly greeted in other European capitals.

However, while New Democracy might win enough seats, would it have the democratic legitimacy to push through further troika-dictated austerity measures in a situation where anti-bailout parties had won two-thirds or more of the popular vote? Almost certainly not. Sooner or later, and probably sooner, even a New Democracy-led government would almost certainly baulk at imposing further austerity measures and take Greek out of the euro.

That certainly seems to be the view of many central banks, which have been quietly drawing up contingency plans to cope with a possible Greek exit from the eurozone.

With an economy representing less than 2pc of total eurozone output, a Greek exit from the single currency should, in theory at least, be quite manageable. Things might not work out that way in practice.

Ever since the single currency was first formed at the beginning of 1999 we have been repeatedly assured that no country can leave. Euro membership, we were told, was for keeps. If, however, it turns out that a country can leave after all then why stop at Greece? Why not some of the other peripheral eurozone countries -- Italy, Spain, Portugal, Cyprus or even Ireland?

In practice, a Greek withdrawal from the eurozone, by opening up the possibility that a country can leave the single currency, would leave many other countries vulnerable to attack as the markets seek out their next victim. This could very quickly lead to a mass exodus of several countries and the break-up of the eurozone as it is currently constituted.

Such an outcome can only be avoided if Europe's leaders agree to fundamental reforms of the eurozone's architecture. These must include allowing the ECB to engage in quantitative easing, ie to print more money, and act as a lender of last resort. If they don't, then Greek withdrawal from the euro will be merely the first act in the dissolution of the single currency.

Irish Independent