The European Central Bank-Eurosystem has issued its legal working paper, dated December 2009, titled “Withdrawal and Expulsion from the EU and EMU: Some Reflections.”

The report states "one of the main conclusions of this analysis is that, whatever the merits of the recently enacted exit clause (and there are no doubt some), its precise meaning and its consequences should be thought through carefully if it is to bring more clarity to the possibility of and the conditions subject to which Member States may be able to walk away from the Union."

The report says that “if changes to the EU’s composition, whether by voluntary withdrawal or expulsion (or by the accession of new Member States), are not to lead to crises that are prejudicial to the EU’s progress towards further integration, the treaty revision procedure in Article 48 TEU should be overhauled, despite the recent conclusion of the ratification process of the Lisbon Treaty.”

The report adds that “a simplified treaty revision procedure would do away with the need to introduce a separate exit clause or a right of collective expulsion from the EU and, equally importantly, with the need to overcome crises similar to those triggered by the non-ratification of Treaty amendments or by the vetoing of EU accession requests.”

Does this mean that the ECB is preparing for the prospect of Greece leaving the European Union’s single monetary union?

I don’t think we’re there yet, but it can’t be ruled out completely in the future if Greece doesn’t get its fiscal house in order, which would probably require Draconian austerity measures over the next few years.

The big question is if this is politically, economically, as well as socially, do-able for Greece.

In my opinion, the probability of Greece achieving a miracle is practically nonexistent.

Besides, Greece’s national debt is expected to come in at 120 percent of gross domestic product, or GDP, in 2010 to reach 138 percent by 2012.

No doubt, a fiscal squeeze would cause tax revenues to collapse while we would see debt continue to rise higher, caused by a shrinking economic base.

Such a situation would create a deadly deflationary trap.

No doubt, what’s happening with Greece within euro-land is fundamentally not positive for the euro in the near term.

Greece’s 10-year bond yield has already touched 6 percent (5.96% recently), which brings its spread above the German 10-year Bund to 270 basis points, a premium cost zone that if sustained will make it by itself impossible for Greece to cut its deficit from 12.7 percent of GDP now to 3 percent of GDP within three years.

And if all that wasn’t enough, Greece has now also a problem of credibility within the European Commission.

In its latest report on Jan. 11, on “Greek Government Debt and Debt Statistics,” the European Commission says in its conclusion: “… the shortcomings in the operational and administrative capacity of some of the institutions involved in the production of EDP statistics in Greece, referred to in this report, will have to be decisively addressed by the Greek authorities without further delay. Unless the institutional weaknesses uncovered during the investigation of the irregularities underlying the 2009 notifications of data are corrected and proper checks and balances introduced, the reliability of Greek deficit and debt data will remain in question.”

It doesn’t look good for Greece — and that’s not positive for the euro.

No doubt, the euro has reached its turning point and will further weaken against the dollar.

How much the euro will weaken still remains an open question.

A 10 percent slide shouldn’t be ruled out.

It’s understandable that European officials and politicians get more and more concerned about the broader impact of events in Greece.

Jean-Claude Trichet warned last week that highly indebted euro zone countries risk “rapid changes in market sentiment,” hitting economic growth and undermining credibility of European Union rules and institutions.

Last week, German Chancellor Angela Merkel, who in 2007 was also president of the European Council and chaired the G8, made some enlightening comments that were accidentally posted on a government Web site where she stated: “… The government views it as important that each country in Europe takes the Stability Pact and Growth seriously and each member state takes a responsibility for the euro.”

Merkel’s concerns about the outlook for the euro make all the sense of the world.

For the moment, the euro is trading well above its long term averages against a wide range of currencies.

Yes, the euro has plenty of room to fall.

In case that would occur too abruptly, we could see a widespread correction in most markets, except in the dollar and some other currencies.