Jeremy Beckwith: Greek tragedy shows the importance of monetary stability

First, that labour is mobile across the area, and, second, that in times of crisis, there is some means of fiscal transfers from strong parts of the currency union towards the weaker parts.

In the United States, these hold true; labour does move from state to state in search for jobs, and at times of crisis, the federal government can direct funds towards states in particular economic difficulty.

But the idea that European labour is mobile across the currency area – for example that unemployed Italian steelworkers might move to Finland in search of new jobs – is clearly unrealistic.

Thus, in order for the single currency to succeed, there needs to be a mechanism for transferring money from strong economic areas to the weaker areas. This, however, directly contradicts the no-bailout policy that was agreed by all members of the single currency at inception. Nonetheless, rescue now seems to be possible under a relatively obscure article of the Lisbon Treaty.

Greek industry, like many of the old non DM-bloc countries (Portugal, Ireland, Spain), is now uncompetitive with German industry, even though Germany originally entered the single currency at a relatively high exchange rate. Greece therefore needs to reduce its costs in order for its private sector to be profitable – the ways of achieving this are either to reduce jobs and boost productivity or to cut wages. The old solution of devaluation is no longer available.

Today, Greece is in a deep fiscal crisis, which has come to a head in the past couple of weeks.

For some time, its level of government borrowing and public debt has worried investors, who no longer buy its debt. And following European Union debate, a three-year rescue plan has been announced predicated on higher taxation and public sector wage cuts to reduce government spending.

Greece, however, has a long history of non-compliance with taxes, and also no history of a democratically elected government actually taking on the public sector unions and cutting jobs and wages. Nonetheless, prime minister Papandreou and his cabinet have uncharacteristically implemented a public sector wage freeze and pay cuts have been implemented to meet EU demands.

Predictably, this has provoked a number of strikes by key workers with the threat of more, underlining the traditional levels of domestic belligerence amongst Greek workers.

The downside of being part of the single currency and having these problems is that real wages have to fall, and, at a time of low inflation, this means that nominal wages have to fall.

Those with debts will find that their debts do not, however, fall in step with declines in their incomes, and so large declines in standards of living and bankruptcies have to occur.

Ireland and Estonia have understood this and have reduced nominal incomes, so far with little political opposition. But signals this week from Greek workers indicate they do not accept the political and economic realities of being part of a single currency.

There is now an amalgam of "solutions" to this Greek tragedy, such as a substantial borrowing facility permitted under the Lisbon Treaty, and possibly early payment of EU structural funds. And another permutation is that the EU via its investment bank could borrow money relatively cheaply to buy Greek bonds or the EU might issue common bonds with Greece assuming a share of proceeds, which would reduce the cost.

It boils down to a case of definitions – what is a bailout? The rule is simple. The EU "shall not be liable (for] or assume the commitments of central governments".

For Germany, monetary stability is the single most important policy objective, and has been since 1945 – this means that it is unlikely to permit Greece, or anyone else, to leave the single currency or to default on their sovereign debt.

If it bails out Greece, then other nations with similar problems will see that they, too, can let Germany bail them out, and Germany will slowly become the guarantor for all eurozone debt.

It remains to be seen how tough a bargain Germany can get in return, in terms of future adherence to sound economic policies.

Jeremy Beckwith is chief investment officer for wealth manager Kleinwort Benson.