Southern Europe: Revolt Now Or Default Later

“The policy is being set by the AAA core. The Commission bends to power, and will not move unless the rest of EMU mobilises superior counter-power. All else has become irrelevant in the euro snake pit.”
---Ambrose Evans-Pritchard, Daily Telegraph, April 24th, 2013

There are two schools of thought emerging among the non-delusional community with respect to the future of the eurozone. One view is that the ECB can still, by heroic action, save the eurozone. The other view is that it is now too late for the ECB to save the eurozone, and that the Club Med bloc will need to resume monetary sovereignty.

I cling to the former view because the alternative is pretty awful. I find it hard to grapple with the idea of some of the world’s largest debt issuers defaulting on their debts. It’s a horrific prospect. Euro exit by Italy or Spain would eviscerate the European banking system and cause a Lehman-squared.

But is the ECB rescue scenario possible? First, we will need to dispense with current ECB politics. This scenario only works if the ECB comes to Jesus and executes a total policy reversal as a consequence of the imminent default of Spain or Italy. So it is a given in this scenario that either the ECB sees the light on its own, or the Club Med bloc somehow forces the ECB to reverse course.