University of Pennsylvania economist Jeremy Siegel says the least disruptive route Europe can take is to sharply lower the value of the euro.

The reason, says Siegel, is that if Greece exits the euro and establishes a new currency, both Greek deposits and Greek debt will be converted into a new currency that will sell at a steep discount to the euro.

“If Greece took this action, it would cause bank runs in Portugal, Spain, and even Italy as depositors fear their governments will do the same,” the economics professor at the University of Pennsylvania's Wharton School. writes in the Financial Times. “Although Greek and Portuguese banks are relatively small compared with those in the EU, banks in Spain and Italy are not.”

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“A run on the banks in those countries would need to be met by massive loans from the European Central Bank to prevent an all-out financial collapse.”

Devaluing, on the other hand, would help improve the trade deficit in the peripheral countries and bring some relief to their downward spiraling economies, says Siegel.

Euro depreciation would also push the German trade surplus even higher and cause some inflationary pressures in those few European countries that are still near full employment.

“Given the strong German labor market, a lower euro would be likely to raise German wages and help close the gap between German and other European labor costs," he says.

“The mild inflationary effect of a euro closer to dollar parity would be far less painful for all concerned than forcing austerity or internal devaluation on the peripheral countries.”

Bloomberg reports that the Organization for Economic Cooperation and Development expects Greece’s economy will shrink more than the government expects in 2012 and 2013 even if it makes all structural changes laid out under the country’s bailout, contracting 5.3 percent this year and 1.3 percent in 2013, after shrinking 6.9 percent in 2011.

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