Loan behold: will Greeks' belt-tightening be enough to avoid calling in the IMF? Photograph: European Union 2010

The epicentre of the current debt storm is Europe, with Greece in the spotlight. Debt crises are always brutal, especially if they involve massive twin deficits (both government profligacy and external imbalance) and heavy reliance on borrowing from abroad. There has to be an unpleasant period of belt tightening to get figures back into shape, whether it is financial markets or the International Monetary Fund (IMF) that impose the tough measures needed.

The problem currently faced by Greece is no different to that of a number of other countries, such as Hungary, Romania, the Baltic states, Turkey and the Ukraine, which all received IMF assistance between late 2008 and spring 2009. But the implications for the euro area are far more probing when there is a crisis in one of its member states. Brussels’ ability to take care of its own backyard has been called into question, whether or not Greece fails to refinance its debt and needs a bailout.

This has also raised the question of euro exit, although such a move looks not only politically unattractive but practically impossible. Announcing an exit strategy would leave Greece in financial limbo and facing a host of complications, including the urgent need to refinance a substantial portion of debt this year.

Is devaluation really as important as some claim? Outcomes have been mixed for EU members outside of the eurozone, like Britain, the Czech Republic, Hungary and Poland, that have devalued their currencies. Countries with euro pegs such as Bulgaria, the Baltics and Romania had the option to break away and devalue yet few actually did (Romania saw a modest devaluation but has since stabilised). But outside the EU, some of Greece’s “Club Med” tourism competitors such as Turkey did let their currencies weaken, stirring up opinion in favour of Greece also devaluing.

It must also be remembered that devaluations did not help Greece in the past. Instead, they led to instability and low growth. Exit from the euro would not resolve Greece’s underlying tensions, which are chiefly related to inconsistent and unsustainable aspirations for higher rates of growth, fed by overly generous fiscal policy and foreign loans. Unrealistic expectations simply foster persistent instability, not economic progress, whatever exchange system is adopted.

While the macroeconomics of Europe's monetary union have proved difficult, as many expected, the reality is that the currency has made exchange and business easier to conduct across the euro area. From a financial market standpoint, the euro has been successful. It also has strong support politically. Perhaps the European debt crisis will finally force macroeconomic policies into shape as well: instead of being a breaking point, this might just prove a making point for the euro area.

Can Greece avoid recession? If the country’s debt level had been lower in 2008 (like Britain's), it might have been able to fund a short run of high deficits. If most of the debt had been held domestically rather than abroad, then high local savings and domestic support may have been able to fund the increase (like Japan). Or Greece could have maintained fiscal prudence and undergone recession in 2008-2009, bringing down the trade deficit and curbing foreign debt. But with little credibility and substantial demands for external financing, it is now in no position to survive without sharp adjustment – inevitably implying a recession.

If this new austerity programme fails, the next stop will be the IMF or, possibly, a debt work-out plan along the lines of the "Brady bond" escape route used by Latin America in the 1980s. But this was also far from a painless solution: a decade of lost growth is unfortunately all too probable in this case. Greece would be best to opt for speedy if tough debt reduction, which would gain the approval of both the euro club and financial markets. Credibility, and access to fresh credit, would be quickly restored.