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Greek risk begets more uncertainty

To that end, Harnett believes the minimum requirement over coming weeks is to flesh out the idea of euro-wide bank deposit insurance to forestall the risk of destructive bank runs.

Willem Buiter, chief economist at Citi, agreed that a blueprint for a banking union, of which a deposit guarantee scheme would be one component, could emerge as soon as at next week's summit.

He also expects the eurozone in due course to beef up the role played by its embryonic rescue fund, the European Stability Mechanism, so it can help reschedule eurozone government debt. But Buiter, who coined the term “Grexit,” still thinks Greece is headed for the euro exit at some point.

“Ultimately we anticipate that a mixture of banking union and expanded ESM and a sovereign debt restructuring mechanism should be enough to keep a 16-nation euro area on the road,” he told a conference call.

Buiter favors granting the 500 billion euro ESM a banking license so it has more financial firepower, but he said there was not yet enough support for the idea.

“It will probably take another couple of panics to get that implemented against continuing German and European Central Bank opposition,” Buiter said.

That comment goes to the heart of the frustrations of many academics and policymakers outside Europe: not until the eurozone is staring into the abyss do its leaders contemplate radical steps to put their currency on a solid footing.

“In the eurozone and other advanced economies, politicians seem unable to come to terms with the need for decisive policy actions, instead settling for half-measures and defensive policy interventions when backed into a corner,” said Eswar Prasad, a Cornell University economics professor and senior fellow at the Brookings Institution in Washington.

To rebuild credibility and revive growth, Prasad urged politicians to summon up the resolve to tackle powerful vested interests and implement structural reforms to product, labor and financial markets.

This would then create some space for back-loading measures to bring the rise in public debt under control.

“The global economic recovery is being held hostage by political brinksmanship that has created policy paralysis, undermined confidence and stymied the effectiveness of macroeconomic policy tools. In the absence of political leadership to undertake decisive and concerted policy actions, it is hard to see the recovery gaining traction,” Prasad wrote in a Brookings article.

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