The Greek legislature has approved a fierce austerity package and protesters are in the streets of Athens. Approval of the package will pave the way for more bailout money but the violence of the protests suggests that the Greek public is unlikely to accept much more in the way of austerity. This probably is about as far as a bailout/austerity strategy can go.

With Greek public debt already at more than 140% of GDP even before the bailout, it’s reasonable to ask if the strategy can even work. The austerity part of the package has a negative impact on growth yet economic growth is needed if the country is to service its debts. It’s still likely that sooner or later some kind of negotiated default and/or an exit from the euro will happen — especially if the willingness of the Greek voter to put up with austerity is seen to have reached its limits.

An obvious question, of course, is whether the defaults will end with Greece. None of the other eurozone countries has quite such an awful balance sheet. Italy’s public debt to GDP ratio is close, but the economy is far more diverse and resilient; its unemployment rate, around 9%, is not disastrous (though a youth unemployment rate of around 29% is socially worrying).

More in danger would be small counties like Portugal and Ireland, whose public debt-to-GDP levels are between 90% and 100% and that have fairly bad unemployment levels already. Spain’s unemployment rates are worrying, but at around 60% its debt-to-GDP level is less burdensome. These economies are probably more bailout-able than is Greece but then again can the eurozone afford two more government bail-outs before people start asking questions about the public finances of the countries footing the bill?

But perhaps this is not really the right question to be asking. Let’s assume for a moment that Greece, Portugal, and maybe Ireland do all leave the euro and that part of the package might be a redenomination of public debt at a rate that gives a bit of a haircut to bondholders so that the debt burden is somewhat reduced (a sort of stealth default). That would leave the euro as a currency union between Germany, France, Italy, Spain, the Benelux countries, and maybe a few very small or sound small counties.

This outcome might not be a bad one. The idea of the euro would be preserved and the economies in it might be close enough to each other for convergence on monetary policy to be reasonably feasible most of the time, which is arguably not the case at present. According to this rationale, therefore, the exit of Greece, Portugal, and Ireland from the euro would not toll a death knell and arguably would make the currency union more sustainable.

If that’s so, what europhiles should be worrying about is something very different: Germany’s appetite for staying in the euro. The common currency really would be doomed if Germany were to choose to recreate the Deutschmark. If it did so, the Benelux countries, Austria, and the Baltic states would surely want to join. The Scandinavian countries would peg their currencies to this new union as well. You could advance plenty of arguments in favor of this kind of move.

This scenario would obviously be very uncomfortable for France, Italy, and Spain and they will fight to prevent it. Now, how the crises in Greece, Portugal, and Ireland are handled may well have a bearing on the political calculus of any decision by Germany to leave the euro. For this reason, I do wonder whether what we’re observing isn’t a highly delicate dance, in which the big European counties (especially France) are trying to demonstrate commitment to the euro while actually thinking ahead to the exit of the weaker members.

That may sound like too much like a conspiracy theory but it’s probably worth at least thinking about. And whatever is going on, I think it’s fair to say that the passage of the Greek austerity package is unlikely to represent a resolution to the Greek crisis.

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