Krugman thinks the Eurozone is about to go “Kaboom.”
However, I think there’s one more can-kicking-option available, and its been opened up by the fact that Greece suddenly has no government.
The problem with the Greek Situation is that we have, in essence, a game of chicken. If Greece actually defaults, or Germany actually stops bailing Greece out, it’s a disaster for everybody. But outside of that option, Greece and Germany have a lot of room to negotiate: Germany want’s Greece to make lots of harsh measures, and Greece wants bailouts with as little strings attached as possible. By totally and completely failing to form a coherent government (and they won’t have one for the next month or so), Greece has made “more austerity” impossible. Without a government to pass laws, you cannot create more austerity, so suddenly Germany’s choices are no longer between forcing default, applying pressure to get a better deal, and continuing with bailouts, but instead Germany’s choice is simply between bailouts and default. Faced with that choice, bailouts are the smart move.
Of course, it remains to be seen whether bailouts, in absence of austerity targets being met, will happen. There’s currently a slow motion bank run happening, which I suspect will quickly turn into a full sprint bank run, and the only thing that can stop it is a full commitment from the ECB to act as lender of last resort. If Germany gets it together to make that happen, then we might kick the can down the road for a few more months. If not, Greece will likely have to pull the full Argentina, with capital controls and forceable conversion of Euros into new currency, and as soon as that happens, no sane person would keep money in a Spanish, Portugese or Italian bank. Hell, even the French-German Bond spread (a good measure of how scared the markets are that France might default or leave the euro), is on its way up. Without an open ended promise from a central bank, the Eurozone could get interesting, and FAST. I’ll take pictures in Paris this summer!