It is almost game over for the euro zone

I wrote an article for Room for Debate at the New York Times on the potential for a Greek collapse to end the euro. Here are the parts I would highlight:

Papandreou’s decision to call a referendum has put the Greek government at risk. Indeed, the government may collapse before any referendum is called.

But the decision was necessary because austerity is deeply unpopular in Greece and has already caused tremendous social unrest… Given the widespread perception among Europeans that the E.U. system is undemocratic, there was no alternative but to put these measures to a vote to ensure their political viability in an already volatile social environment.


Will the collapse of the Greek government destroy the euro zone? It certainly could. Italy’s recoupling to the periphery is well-advanced, making it now the focal point of the sovereign debt crisis. Bond yields in Italy and elsewhere in the European periphery have skyrocketed. Contagion has spread to the banks as well.


The E.C.B. has been forced to intervene for Italy. However, the damage is already done. Unless the E.C.B. acts as a lender of last resort, it is game over for the euro zone.

Click below for the full text and other opinions on this issue.

Source: Will Greece Destroy the Euro Zone? – Room for Debate, NYTimes

  1. Matt Stiles says

    It is time to start discussing what a post EU, post EMU will look like and what it will mean for investors the world over.

    Both Merkel and Sarkozy have raised the spectre of war. I don’t know if that is fear-mongering to get people to go along with their schemes, or if it is seriously their “solution” to get the economy going when (not if) this all comes unglued.

    1. Edward Harrison says

      When politicians bring up war, it is almost always a fear-mongering ploy. Their solution won’t work. They have just torpedoed it in Cannes by stepping all over Greece while the Italians rejected austerity. The plan now is a shambles and has no credibility whatsoever.

  2. ChrisBern says

    “Unless the E.C.B. acts as a lender of last resort, it is game over for the euro zone.”

    I completely agree with that statement, and I think most people have come around to believing it as well. Therefore, it seems reasonable to assume that the Central Bank WILL eventually act as a lender of last resort so as to avoid Armageddon. My thinking goes something like this:

    The only way the euro zone survives is through the ECB

    All of those who hold the power in the euro zone (not to mention United States et al) desperately want to keep it intact and fear the consequences of collapse

    Therefore one way or another, the ECB will almost undoubtedly bow to that enormous pressure–eventually. The only way to not believe this is to think that the ECB would be willing to stand by and watch as the system collapses all around them–which would be suicidal inaction by the ECB anyway because there would no longer be a need for a Euro-wide central bank if the union dissolved.

    To me I’m running under the assumption that the ECB will eventually backstop the system. If that’s assumed, then what becomes interesting is (a) will they do it soon enough to avoid major collateral damage (if that’s not already too late)? (b) what consequences will this intervention bring, unintended and otherwise? (c) what would this mean for the euro exchange rate, the price of gold/equities/bonds, etc.

    1. Dave Holden says

      It’s a fair bet that the politico-financial elite will try everything to preserve the (broken) status quo. A continuing of market distortion and more ignoring of electorates is guaranteed. The next stage will be bending/breaking laws/treatise and “cajoling” of electorates through “catastrophe” stories and more. Whether there’s a “greater good” justification for this I remain unconvinced. Even if a path through this “liquidity” crisis is found, fundamentally I don’t see a growth path that would sustain the politics of what is needed and that’s fiscal union.

  3. joey says

    70% of Greeks want to stay in the euro, perhaps that will win out in the end, as the consequences of rejecting the bailout are quite sobering. A passed referendum would inject much needed legitimacy into this process.

    1. Dave Holden says

      I’m thinking the wording of this referendum will be key – this all makes me think of this

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