Smith, now a highly-respected summariser and pundit with Sky Sports, reckons the French giants will be in the market for a new manager in the summer – and that Wenger fits the bill perfectly.
The Arsenal boss is refusing to walk away from the Emirates after 21 years with the London club and the Gunners hierarchy want any parting of the ways to be amicable.
Smith feels PSG could be an alternative. He said: “If Arsene was offered the PSG job then that might influence his decision on whether to stay at Arsenal.
“I think it would reinvigorate him. And although Arsene probably wouldn’t see it that way, I also think it would help the players he would leave behind at the Emirates.
“The French national team is another job that I think would appeal to him, but it’s the Paris job that might appeal most because it is a sleeping giant that has woken up.
“PSG are a club that has the potential to be a global giant like Real Madrid and Barcelona and I think Arsene would fancy taking them along that journey.”
Smith, who won two titles with Arsenal as well as the FA Cup, League Cup and European Cup Winners’ Cup, feels his former club will be at a crossroads this summer when Wenger’s current contract expires.
He added: “This is definitely a crossroads. They could turn left or right or stand at the crossroads by allowing the manager to stay.
“Arsene has spoken about reinventing himself but I am pessimistic about his ability to do that after so many years because there is no-one at the club to challenge him now.
“Arsene doesn’t want to be challenged. He doesn’t want any dissenting voices. So the board know they’ve got a big decision to make because of the reaction of the fans.
“Other fans look at Arsenal supporters and laugh. They think ‘what have you lot got to worry about? You have won the FA Cup twice recently, you’re in the top four, what’s the matter with you?’
“But when you are an Arsenal fan, that isn’t good enough, especially when you are paying through the nose for season tickets and you look at the other top teams.”
Smith’s former Highbury team-mate Paul Merson reckons their old club will struggle to attract the kind of players needed to revive the team if the Frenchman extends his reign.
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Merson said: “There is no chance of top players coming to Arsenal. Ten years ago everyone in the world wanted to play for Wenger, but not now.
“A few years ago they could have signed Luis Suarez. If they had paid 50, 60, or 70million they could have kicked on and won the league.
“Instead they offered £40,000,001 and it backfired. That just showed you the arrogance of Arsenal that they still think the best players want to sign for them.
“Do big players look at Arsenal and think they can win the title and compete in the Champions League? I don’t think so.
“Liverpool have gone 27 years without the title and I can see Arsenal drifting away like they did.
“In fact, this could be a lot worse than the Liverpool situation.”