Barry Eichengreen: An 'explosion' in Europe remains a real risk

The University of California's Professor Barry Eichengreen was among the first to warn that monetary union in Europe would mean stronger countries having to prop up weaker ones, says Finanz und Wirtschaft. Eichengreen, an expert on the Great Depression and the gold standard, is still worried that the euro crisis could end messily.

The European Central Bank's willingness to buy peripheral debt, and discussions among policymakers about fiscal and banking union, are steps in the right direction, he says, but "the pace is too slow". There could be "an explosion" before the future of monetary union is secured.

A risk that many investors have overlooked is "the collapse of public support for, or at least public acquiescence to, the austerity policies required to work down heavy debt burdens", he says. Mass protests and growing support for the Greek neo-Nazi party are warning signs.

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If a "rejectionist" government emerges, the crisis could come to a head as the austerity programme would collapse and a default would look imminent. And there is still the danger of "contagion".

If Greece, the prime candidate for a euro exit, quits the currency, rattled savers in other peripheral states would move their money north and investors would panic about other countries going bust. That raises the prospect of collapsed banking systems and defaults beyond Greece as yields spiral.

For now, Greece will need another debt restructuring, while the whole zone would benefit from more stimulus from the European Central Bank, says Eichengreen. The Bank should tolerate a higher rate of inflation it would help wages and prices in the core to rise, thus closing the competitiveness gap between north and south, which is the root cause of the crisis.