Plan ‘A’: Stay in the Euro, drop wages & prices for local produce, until Greeks are as productive as Germans. This will take a decade or two of grinding, unrelenting economic misery, during which anyone with any talent, ambition or ability will leave the country and everyone else will be scarred by the experience. Each year brings more “austerity” more riots and more chance of extremist politicians gaining power. Germans effectively run the Greek economy. I cannot see how this will not end up with bombs in the streets.
Plan ‘B’: Leave the Euro on a Friday evening, and by Monday morning, all bank deposits are in Drachma, which then falls by 50% against the Euro. Greece’s principal export, sunshine, becomes cheap as drachma-denominated hotel-prices fall. Once-empty hotels become full of people looking for cheap sunshine. The pain and turmoil of the inevitable capital flight and economic chaos lasts 18 months to 2 years before the economy returns to growth, but may result in extremists getting power in the mean-time.
Either way, Greeks are much poorer and may end up with an unsavoury demagogue in charge. They were of course never rich, but just thought they were because they nicked the Germans’ credit card for a while.
The same is true for Spain & Portugal, though their overspend is less egregious and their political culture an order of magnitude more mature than Greece’s. The Spanish people in particular have been impressively stoic – they voted for austerity, and haven’t so far chucked many rocks. They would, of course be better off leaving, but they may, just, be able to hang on in the Euro by the skin of their teeth. The public & political will appears to be there, for now.
Italy should go too, but as a founder member of the EU, there is probably just enough political will outside Italy to keep them in the club and as they’re running a primary surplus, they’ve probably the financial ability to achieve plan ‘A’ without too much pain. It will of course be a decade before Italy grows again.
Or Plan ‘C’: the ECB can announce that all €zone bonds rank Pari Passu with Germany’s. Everyone pays 4% but Germans’ living standards fall steadily towards the Eurozone average as capital floods south, but the Eurozone holds together but with one economic government. The Germans will get control over the cash jar and European nations cease to be independent in any meaningful way. Good luck with those treaty negotiations!
Conclusion: Greece, and probably Spain & Portugal too will be picked off by the markets and be forced out of the Eurozone. Italy will probably stay in.
The Euro miserably failed its first stress-test, because idiot politicians thought they could defy economics and make water flow uphill by means of a resolution of the Council of Ministers. The single currency was a silly idea, badly implemented. It is a disaster which is going to cost the life chances of hundreds of millions of southern Europeans.
Be suspicious of a politician with a big idea. The safest thing to do with these creatures is shoot them on sight.