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There are any number of possible outcomes being discussed for Greece.
Occam’s razor says that the simplest is the most likely. So what’s the simplest?
Start first with a key fundamental: Greece is unable and unwilling to pay its debts. In light of this, its debt will either need to be forgiven or it will have to default.
Default would cause a crisis in the European banking sector and would quite probably force Greece out of the euro, creating an existential crisis for the single currency and quite possibly for the European Union.
The European Central Bank and the EU itself will not jeopardize their existence, therefore they will do everything they can to maintain the euro and, therefore, Greek solvency. The German state’s post-war sense of self is interwoven with its commitment to European integration as a testament to its resolve never to be the cause of another European war.
The EU is integral to Germany’s commitment to European peace. Therefore Germany will do all it can to maintain the euro and, therefore, Greek solvency. And as Europe’s biggest and richest state, Germany can do a lot to that end.
The sums of money required to rescue Greece are large but manageable for Europe’s rich core. But an all-out Greek rescue will trigger similar demands from Ireland and Portugal, which are in similarly dire economic straits. All three rescues are manageable. But if they all have their debts forgiven, Spain and Italy will also seek help to overcome their problems.
A full rescue of Spain and Italy is beyond what core European taxpayers would be willing or able to tolerate.
So Greece needs to be rescued without triggering an avalanche of similar demands from across Europe’s periphery. The answer is to extend further loans to Greece and to pretend that Greece will have to pay them back eventually. This rolling over of debt can be done for years on end. It’s called extend and pretend.
But it must not seem too easy. Therefore Greece needs to be seen to be paying a cost for its rescue. This cost is called austerity.
Greeks, however, do not see how such austerity can end in light of their enormous and crippling debts. For many, the benefits of staying in the euro are being outweighed by the costs.
In the absence of a wholesale debt forgiveness by the EU, Greeks will seek default. But since Greek debt forgiveness would cause a chain reaction of unaffordable demands from across Europe’s periphery, the EU will need to consider engineering a Greek default in a way that would not jeopardize the euro and the EU.
A default that affects the European banking sector would trigger a pan-European financial crisis which would jeopardize the euro. So the ECB and the EU will bear the cost of the default.
They will do so with their fingers crossed that Ireland and Portugal do not also seek a default on the same terms.
But Ireland and Portugal will seek a default on the same terms, because it is better than endless, unrelenting austerity. Spain and Italy will follow suit.
And this is how the euro ends.
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This is a really well thought out but concise analysis – MASSIVELY better than the dozens of others I have read!
The bailout of the PIGS will continue until this debt has been transferred from the private sector to the public sector. Basically what has mostly happened in Ireland already. Once this is done the Euro Elite will be off the hook and the euro sector taxpayers will have to absorb the cost one way or another. This is the main issue!! The euro elite made great money lending to these PIGS at unrealistically interest rates and without any of the due diligence that would normally have accompanied loans to marginal economies. Having made great returns for the last decade they now want to dump the mess that they created onto the euro zone tax payers. This is why 3 years+ into this solvency problem they are still treating it as a liquidity problem that given more time will go away. Once this debt has been fully transferred to the public sector a real solution will be found. Most likely solution will be with Eurobonds backed by all euro countries ( taxpayers) and a euro finance minister who will be charged with the due diligence of ensuring any euro country applying for these bonds can afford to pay them back.. This will be the price that the PIGS pay in order to escape their financing dilemmas, essentially the loss of their fiscal policy (such as they are) to the EU. This will not solve the solvency problems of Greece or Portugal ( they canuld never pay back thier debts at par) and they will still have to be bailed out but this to could be worked out in a way that would make a similar deal for Ireland, Spain etc etc not an appetizing solution All in all a very favorable outcome for the bond barons of the EU. For a decade they made great money, the risk that came from this get passed onto the citizenry of euro countries and not to them. And the mess they created can be massaged into a positive because it forces the next step in the integration process of Europe , ie centralized fiscal policy. I just hope it’s not seen by the PIGS as really an economic take over by the northern EU countries. Why should Germany invade when it can do what the USA has done with the rest of the 2nd/3rd world…( ok did; past tense now its Chinas turn lol). Get third world countries into debt then rape their resources.
The German ‘Volk’ have been trying so hard since the war to prove that it is “Deutschland BESIDE All” (Not Over All). All of this is a betrayal of the German workers. They haven’t yet realized how badly they are going to be affected by the bailout of Mediterranean Europe and the subsequent bailout of their own greedy banks. Their notion of “Beside All” is going to be shot to pieces. In reality, the Euro is an attempt to blend ‘Chalk and Cheese” or “Iron mixed with Clay”
Refreshing article. Someone is finally telling the truth. The Euro is DOA…
Who to say Germany bailing out Greece would prevent future European conflict? What if, by bailing out those PIIGS sooner or later the German public will feel or have a sense of entitlement and “owning” of Euroland since they are the paymaster….been bailing out left & right might as well OWNED them outright. Rich dad says, don’t throw good money after bad…
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