The Eurozone - the options

What are the crisis exit strategies available to the Eurozone? Broadly speaking, there appears to be four.

Germany could provide its tax revenues to finance the deficits of southern Europe. Naturally, this is the option of southern Europe would like to see. However, it neglects the fact that Germany's fiscal position isn't that strong. Besides, while Germany may be the largest economy in Europe, it does not dominate Europe. It simply isn't big enough to fund the deficits of Italy, Portugal, Greece and Ireland. Furthermore, German voters are understandably reluctant to see Southern European hands dive into their wallets.

The second option is a public sector debt default while the southern European basket cases try to hold onto the single currency. Unfortunately, European banks would bear the cost of the default since they are holding large quantities of Eurozone debt. This has the highly unsavoury implication that the European banking system would be destroyed, leading to a catastrophic depression. The Eurozone could try to prepare for this option, by recapitalising troubled banks. However, that will cost real money and no one in Europe seems ready for a further round of bail outs for bankers.

Then, there is the nuclear option - several of the weaker Eurozone countries could exit and re-establish their national currencies. In practice, this looks a lot like option two. Presumably, the debts of the exiting countries would be re-denominated into domestic currency. Eurozone banks would still go bust, and the catastrophic depression would still happen. The only upside would be that southern Europe would, in the short run, restore a degree of external competitiveness. There is also an intriguing variation on this idea. Germany, along with several other northern European economies could leave the Euro, allowing southern Europe to cope with the demands of a single currency.

Finally, there is the do-nothing option; Eurozone countries frantically scour the Earth for credit lines that will delay a reckoning. Hopefully, something will turn up, perhaps a sudden surge in Eurozone growth that neatly resolves all fiscal difficulties. It is the fantasy option, partly rooted in delusion, but mostly driven by a fear of confronting the true magnitude of the crisis facing Europe.

So what is it going to be? It will be indecision, stretched to the limit, until the single currency collapses in chaos. That is just how it is with Europe.