Europe reaches a critical juncture

Meant to be a week of popping Champagne corks with Europe Day and the Festival of Europe, in Florence, championing the peace and prosperity secured in the region over the last 60 years - the emergency discussions about Greek debt restructuring and yet another downgrading of the country's credit rating, by Standard and Poor's, certainly spoilt the party. European stocks retreated and some analysts suggested that Ireland and Portugal would soon be back at the debt-restructuring table too. Italy also failed to receive a clean bill of health this week, with a report by the Organisation for Economic Co-operation and Development deeming the country's future growth prospects to be "sluggish" and "uncertain" at best.

Speculation has even grown over Greece exiting the eurozone and returning to the drachma – although, this mainly originates from journalists and politicians hostile to the European Union. And UK Independence Party leader Nigel Farage happily bragged that a leading Twitter trend during the celebrations was "#No2EU". Never has the contrast between Europhiles and Eurosceptics been more pronounced.

But what would the consequences be if Greece were to decide it was better off on its own, rather than living by the new diktats imposed on those nations that are members of the single currency? Cass Business School financial lecturer Simon Hayley suggests that the country would suffer just as much as the rest of Europe from its withdrawal. He states, writing for PublicServiceEurope.com: "Firms, including banks, would find their balance sheets hit by unexpected revaluations of their assets and liabilities.

"This would cause real suffering and could well trigger a new banking crisis. At the very least there would be massive financial uncertainty before the situation was resolved. Any serious analysis by Greek or other eurozone policymakers should rapidly reject it as an option. Massive financial disruption would result. It would be a cure, which is worse than the disease."

Meanwhile, others feel that the EU's "soft restructurings" – piling more debt on top of already unsustainable leveraging - will not be enough to stem the tide in Greece, Ireland or Portugal. Chief economist at the Centre for European Reform think-tank Simon Tilford insists that this combination of longer maturities and lower interest rates will fail. He adds: "By 2013, there will be no viable alternative to 'hard restructurings' (default) comprising debt write-downs of 50 per cent or more. Unfortunately, in the case of Greece and Portugal – even this will not guarantee continued membership of the euro."

Bold words, indeed, but not everyone paints such a bleak landscape of the future. Some economists still maintain that the single currency can emerge, from its economic hibernation, as a world force - performing strongly against the dollar as a reserve currency and propelling Europe up the ladder of global actors. Already, we have seen German exports surge above pre-crisis levels – totalling €98.3bn in March, some 16 per cent higher than a year ago.

But is there space for the eurozone periphery to raise its game when the German core is so dominant? And, if not, will those countries most at risk simply regress to national currencies, which due to their weaker position against the euro – would offer more competitive exports and immediate economic boosts, at least in the short term? No less than the future of the eurozone hangs on the answers to these conundrums.