Yet, when your back is against the wall, the response can be surprising. The big danger for the rest of the eurozone is not that Greece makes a complete horlicks of monetary independence but rather that it makes a comparative success of it. For this to happen, life in the proximity of Syntagma Square does not have to become a cakewalk; it just needs to be better than the current situation of economic collapse without prospect of relief.
Suppose that within a year or so of exit, it looks as though the Greek economy is starting to recover. How then would the governments of Portugal, Spain, Ireland and Italy persuade their electorates that there is no alternative to austerity stretching out until the crack of doom? The game would be up.
What's more, the markets would know it. Bank deposits would flee from these countries and end up with German banks which, through the Bundesbank, would recycle them to beleaguered banks in the periphery. In the process, Germany and the other northern countries could end up taking on the risk of the whole banking system of peripheral Europe.
I reckon that well before that stage, either the ECB or the Germans would say "enough". At that point, staring a banking collapse in the face, the peripheral countries would have no choice but to fund their banks by issuing their own money – i.e. leaving the eurozone.
"Why are you so gloomy about the eurozone; can't you be more bullish?" people often ask me. They don't understand. What I have sketched out is the bullish scenario! The bearish scenario is that the current system staggers on, with the peripheral countries locked into depression and deflation for decades to come. I am sufficiently bullish to believe that, somehow, this is not going to happen.Read it at The Telegraph
The final death throes of the euro
By Roger Bootle
(h/t Scott Sumner at TheMoneyIllusion)
The argument for countries to remain part of the EMU (countries can remain in the EU without accepting the Euro) often is portrayed as a choice between chaos or status quo. For several peripheral countries, namely Greece, the current depression already resembles a form of chaos in which the status quo cannot be maintained indefinitely. A third, previously undiscussed option, is that countries remain in the EU but leave the EMU, gaining back monetary sovereignty. It’s true the economic situation may deteriorate initially, but it is already deteriorating across Europe. There is a very real potential upside, whereby these countries default, devalue and then provide fiscal stimulus with economic reforms to jumpstart the economy.