Deeply into the Danger Zone”. This is not a scaremongering newspaper headline, but more worryingly, the title of the IMF’s most recent Global Financial Stability Report, published on 24th January.

Cutting global growth rates from 4% to 3.25%, the IMF concluded that the Eurozone debt crisis has just entered ‘a perilous new phase’. Even Britain’s economy, so far seemingly immune to the Euro debt crisis, contracted by 0.2% in the fourth quarter of 2011. These figures, released by the Office of National Statistics, challenge the wisdom of George Osborne’s austerity measures.

Financial talks to avoid a chaotic Greek debt default muddled on through the week. Excessive levels of Greek debt contributed to the current Eurozone crisis, but this does not mean that government austerity, the European Central Bank’s favoured solution, will solve all of Europe’s problems.

Firstly, no balance of tax cuts and spending cuts can stabilise the Greek budget, which is currently running a deficit of 9.5% of GDP. Raising already penal tax rates only chokes off economic growth and tax revenues. Spending cuts will simply increase expenditure on unemployment, and reduce tax revenues further. Deflation will also increase the real value of debt, making it even more difficult for Greece to pay it off.

Even the normally pro-austerity newspaper The Economist has now admitted that no level of austerity can balance Greece’s budget, which has also been confirmed by a recent IMF study. The social cost of the Euro has become unbearable for Greece. Household incomes are falling by 7.3% a year, and unemployment has now reached 18.2%. Most shockingly, reports now say child and baby abandonment rates have spiked, their parents no longer able to afford to keep them.

But this suffering need not be the case.  If Greece returns to the drachma, it could devalue its exchange rate, boost its competitiveness, and reduce its real debt burden, soon returning to growth, meaning that the rest of Europe will no longer have to bail it out.

More importantly, however, European-imposed austerity may fatally damage the democratic accountability of the European project. The European Central Bank, an unelected institution, will have to impose austerity against the will of the Greeks and other peoples.

Already there has been a rise in popularity of anti-EU nationalist parties in reaction to government cuts, including the Popular Orthodox Rally in Greece, the Northern League in Italy and Jobbik in Hungary. Any deepening of the ‘democratic deficit’ through centrally-imposed austerity will ultimately lead to more civil strife, like that in Greece, accompanied by a backlash against the whole European project itself. Curing the Euro through austerity could end up killing the patient – the whole idea of a federal Europe itsel