How should I begin this post? Let me start out with my former default position:
I have always seen a sovereign default and restructuring within the euro zone as more likely than a break-up of the euro zone. I would say I considered the dissolution of the euro zone as an outlier. See my thoughts from "Anticipating Eurozone Collapse" in March. Increasingly, this possibility is being raised. Granted, the chances are increasing but it still cannot be the baseline case.
-Three options for the euro zone: monetisation, default, or break-up
This is no longer my view. Breakup is my default case now. Let me tell you why.
The German Constitutional Court decision is critical
In June, I wrote that the chances of a euro zone breakup are now increasing, giving background for the current political turmoil surrounding Greece. My conclusion was "the policy decisions that governments and the EU are making cannot be maintained politically in the periphery or in the core"?. A few days later, Nouriel Roubini wrote a very good note explaining then why the Eurozone could break up over a five-year horizon. We both stated that the key to maintaining the euro zone at all was the potential for closer integration of the member states. But the German Constitutional Court decision makes this nearly impossible:
"The Bundestag’s budget responsibilities may not be transferred through open-ended appropriations to other actors. In particular, no financial mechanisms can lead to meaningful fiscal burdens without prior approval," said the opinion.
"No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences," it said.
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