Nobel economists say policy blunders pushing Europe into depression

"There is a risk of a depression lasting years, leaving even Japan's Lost Decade in the shade. The eurozone economy is 20pc below its trend growth rate," he said.

Mr Stiglitz said the eurozone authorities had massively underestimated the contractionary effects of austerity and continue to persist in error despite claims that the crisis is over. "I am very concerned about the future of monetary union, and they haven't yet felt the impact of geopolitical tensions."

He said the eurozone needs joint debt issuance to repair the structural flaws of EMU, but almost no progress has been made. "Europe suffers from fatal politics," he said.

German Chancellor Angela Merkel told the forum that it was hard to manage a currency for 18 states, when sovereign parliaments refuse to follow polices agreed by the EU institutions. Yet she insisted that the crisis countries had slashed current account deficits and the "first fruits" of durable recovery are in sight.

Professor Christopher Sims, a US expert on monetary policy, said EMU policy makers had not sorted out the basic design flaws in monetary union, and are driving Club Med nations into deeper trouble by imposing pro-cyclical austerity.

"If I were advising Greece, Portugal or even Spain, I would tell them to prepare contingency plans to leave the euro. There is no point being in EMU if all that happens when you are hit with a shock is that the shock gets worse," he said.

"It would be very costly to leave the euro, a form of default, but staying in the euro is also very costly for these countries. The Europeans have created a system that is worse than the Gold Standard. Countries are in the same position as Latin American states that borrowed in dollars," he said.

Mr Sims warned that the European Central Bank may not be able to carry out a mass of purchase of bonds unless the eurozone grasps the nettle on fiscal union, and might itself be engulfed by crisis. "A speculative attack could put the ECB balance sheet at risk," he said.

In the end, ECB president Mario Draghi may be forced to intervene and present Europe's political leaders with a fait accompli.

"The Germans don't want the euro to collapse, so if they really need a fiscal back-up in a crisis, they'll come up with it somehow," Mr Sims said.

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