A good pal of mine summed up the crisis to me recently by pointing out that we are all worried about bailing out debts based on assets that aren’t worth anything anyway. The reality is that Greece is never going to pay off its debts, and regardless of whether it stays in the eurozone or not, the defaulting on those debts, mixed with a genuine effort by Greece to reform both the state (including tax collection) and its actual ability to generate real non-state related wealth, is what will save Greece.
The same can probably said for those eurozone countries burdened with banking debt. Ireland and Spain, despite the fact that they failed to deal with structural deficit issues, have economic strengths and a way to return to growth that the bond markets recognise. But only if those debts are dealt with. If eurobonds, or some other form of federalisation or pushing of those debts to the long term are not dealt with, default of some form will emerge as the only way of assuring the markets that the countries in question have the ability to return to growth.
Don’t forget that in Ireland’s case no party, even the far left, is advocating Ireland defaulting on its legitimate state debts. Are the markets be incapable of recognising the difference? Certainly those holding Irish non-bank related state debts would find that the state would still be honouring those bonds.
This raises the question, however, as to euro membership. I’m beginning to wonder is the eurozone actually more robust than we realise, even in the event of a Greek default? Euro exit can only occur if a country decides it, and a Greece which turns its back on its debts will have to engage in reform anyway (matching spending to tax collection) to deal with the reality of having no access to borrowing. Would it take the risk of euro exit for the unproven benefits of devaluation, given that default will hurt it anyway?
After that, there’s the trillion euro question: If Greece can survive inside the eurozone whilst defaulting, will other countries consider it? Suddenly, Angela Merkel could find her bluff being called, with the German refusal, on cost grounds, to federalise the debt resulting in the German government having to bail out German banks being crippled by default in other countries. Maybe it is still the cheaper option. One thing is certain: somewhere in the Bundeschancellery someone is staring furiously at an excel spreadsheet doing the sums.