It is more and more clear that Europe has no good choices left. The only thing more expensive than bailing out the eurozone’s PIIGS might be to let the eurozone go. The Economist explains why:
If Germany were to leave, its Neue Deutschmark would soar as international funk money piled into a bigger, better Switzerland, and German manufacturing firms would suffer. German banks could cope with the switch of domestic deposits and loans into the new currency, but they would have to be recapitalised because their foreign assets in euros would now be worth less in domestic terms.If Greece were to leave, its reborn drachma would plummet—which might be good for its exporters but which would trigger what Barry Eichengreen, a monetary historian at the University of California, Berkeley, has called “the mother of all financial crises”. The devaluation of the drachma against the euro would turn any debts that remained in euros into a crippling burden. At the same time depositors, who are already edging towards the exit, would break into a headlong rush, bringing down Greece’s banking system.
There is more, lots more. Greek banks wouldn’t be the only ones experiencing runs. Any country with the slightest chance of being caught in the maelstrom and leaving the euro would immediately suffer an apocalyptic bank run. This wouldn’t just include Ireland, Portugal, Spain, Cyprus and Italy; Belgium and quite likely France would also see bank runs. It would be a no brainer to park your money in Germany or another ‘strong’ country while waiting to see what happened at home.Northern governments may only now be waking up to the deep cynicism with which some southern governments are approaching the crisis. Neither the Greeks nor the Italians have anything but moral contempt for German and Nordic financial puritanism. They see the northern banks (and bank regulators) as equally to blame for the crisis, and they have in no way lost their national egoism. They are debating in European forums today with the same nationalist selfishness that their predecessors did 150 years ago. They will play every card in their hands — and the fact that an Italian collapse certainly and a Greek collapse quite probably would wreck the whole European economy gives them quite a few cards.The Germans in fact have been thoroughly hornswoggled and despite all their humping and grumping, they are going to pay through the nose. They can pay in the form of massive bailouts and subsidies as long as southern Europeans want northern money, or they can pay in the form of a continental financial crash, the mother of all EU political crashes, and years of bitter ill will throughout Europe. Chancellor Kohl walked into a French trap on the euro, and the trap has sprung on Chancellor Merkel.There is zero, repeat, zero sign that the Germans specifically or the Europeans as a whole have figured out what to do, much less agreed on a plan for getting it done. Will Germany gnaw off its leg to escape from the euro trap, or will it allow the French to bind it forever in a transfer union in which thrifty and punctual German ants will subsidize Latin and Greek grasshoppers?It is honestly hard at this point to say which alternative is worse for both Germany and Europe. Is it better to have a sullen Germany yoked to a Europe that cheats it, or to go through a massive crash followed, one suspects, by a powerful and selfish Germany, a bitter, poor and unstable Club Med — and a scheming, jealous France?This looks more and more like the choice Europe must make, and the biggest question is whether European leaders can make a decisive choice before events make the choice for them.