I have long believed that the only real solution to the Euro crisis, barring a fiscal union which Germany so staunchly opposes, is to publically announce a mechanism whereby countries can leave the Euro in an orderly and negotiated fashion. This would diffuse the crisis’ most volatile element: the market uncertainty arising from the potential domino effect of defaults and Euro exits. As I’ve argued on more than one occasion, a Greek collapse matters little in the grander scheme of things. It’s the uncertainty over how European institutions would handle a Euro exit that generates the potential for contagion to other countries that indeed matter, like Spain or Italy which by virtue of their size are capable of breaking the union should they end up in Greece’s sandals.
Blasphemy say the Eurocrats! Such a mechanism is an implicit acknowledgement that the union has failed and there’s no legal basis for it anyway. Plus, you don’t just walk out of your family do you? Well, actually you do if your family is completely dysfunctional and the house is burning down in front of your very eyes. This is the unfortunate position that Europe once again finds itself in, barely a few months after a series of measures had led many to believe that the crisis had been “solved”. The first was the ECB’s bond buying programme in late 2011 and early 2012 which brought Italian yields back to stable levels (they had hit 7% for a while). The second was the fiscal compact agreed by 25 out of 27 countries in which they agreed to abide by certain fiscal rules or else face an empowered EC now able to dish out punishment. The third was the second Greek bailout, accomplished only negotiating a bond swap with private bondholders. Problem solved? Not. Continue reading