It seems fairly certain now that the Greeks will be back at the polls in the middle June.  Then, it will be a very clear choice between voting for austerity and voting for, er, austerity.  One of those austerities is a function of the rules imposed by Brussels and Berlin.  One of those austerities will be based on being thrown out of the Euro and/or being forced to live only on the tax revenues collected.  The “vote against austerity” is one of the biggest illusions of recent times.  There is only a vote for which type of austerity they are going to get.

It may sound daft, but this is progress.  Because it gets everyone that bit closer to appreciating the axiom that you cannot have monetary union without fiscal union.  The vast majority of the issues we are facing today is down to the fact the Europe has stuck its collective heads in the sand, ignoring the warnings of history – democracy does not function unless that democracy also extends to the currency that you trade with.

Fiscal union does not mean political union – it just means that member governments are willing to stick to a set of rules to ensure that both policies are consistent.  In the US, the vast majority of federated states are not allowed to run budget deficits, and the Maastricht rules were meant to impose a similar discipline on Eurozone states – it is just that democracy got in the way and the populace decided that the rules would conveniently be ignored.  Can the Greeks really cry foul when they never intended to stick to the rules in the first place?

Today, the EU insisted that EuroZone bonds could not be an option without closer fiscal integration/co-operation.  Wow!  That is a massive statement.  Up to now, that idea has not even been countenanced.  Today. it can easily be interpreted as “if you are willing to play by the fiscal rules, we could go down this route”.  For Greece it is too late.  For Spain, Ireland and Portugal this may well be the incentive to keep going, maintain fiscal discipline, and the burden of rebalancing the European economy might be shared more equitably.

This would be a massive boost to markets, a massive improvement for the long-term prognosis of the Euro as a currency.

But what of Greece?  If the choice is austerity or austerity, is there a better type of austerity?  It would seem counter-intuitive to go through the pain without some corresponding upside thereafter.  Greece is a remarkably closed economy, and its only real export is tourism.  The internal devaluation required for Greece to be a great value destination again whilst staying in the Euro is probably too great.  A floating drachma would get there much quicker.  This would put immense strain on domestic finances as imports (particularly fuel) would soar, but it would start to provide an element of hard currency in export terms with which the economy would be rebuilt.  One area that is often missed in the analysis of a “Grexit” is that the currency devaluation would incentivise foreign direct investment.  German Euros may find their way to Corfu anyway as Greek property suddenly offers great value.

The other great risk in this scenario is the contagion in the banking sector.  In the short term this would be a liquidity risk rather than a capital risk (Greek assets are already heavily provisioned).  The ECB has already shown that it can put its shoulder to the grindstone when it really becomes necessary.  It will be.

In the meantime, the rest of the world (and remember that is over 75% of the global output) continues to grind out a level of growth that, whilst not exciting, does allow companies to churn out earnings and dividends roughly in line with expectations.

The European “problem” is not one that will be solved quickly, but we are definitely inching in the right direction.  In the meantime, the UK takes on the mantle of safe haven.  Sterling assets suddenly don’t look that bad at all.