There is plenty of excellent commentary on the rapidly unfolding Greek financial crisis so I want to stand back slightly and muse on the bigger picture. This is an economic problem that arose from a political goal. There is a threat, I believe, not only to the euro currency in its current form but to the wider European political structure.
The euro was created largely as a near-final stage in the “project” of European political integration pursued by a generation of politicians and officials. It was widely identified at the time of the Maastricht treaty in 1992 that the European Union was not an optimal currency area (an economically homogeneous territory) and that a single currency would cause tensions that could only be resolved by fiscal transfers that required a supranational political entity. The USA is also not an optimal currency area but it has a federal government that mitigates state economic imbalances and its people are willing to move and speak the same language (more or less). But that was the point: the engineers of the single currency wanted further political integration, to achieve something resembling a United States of Europe.
It was never clear that majority of European people wanted this new structure and the recent initial votes against the Lisbon treaty in Ireland and France showed that there was a lot of latent hostility to the EU. I think it’s fair to say that the “elites” who were so enthusiastic about political integration knew more about politics than economics. But their ignorance of economics now threatens their political achievements.
For it is now clear that the critics were right. The huge economic diversity within the eurozone, combined with some dishonest dealing by the former Greek government, has brought about the predicted crisis. Either we get huge and permanent financial transfers from richer EU countries (chiefly Germany) to the poorer (Greece, then Portugal) which entails a wider political union. Or Greece and Portugal and possibly Spain will have to leave the euro. That is, we either move politics forward or economics backward.
Since political union is quite out of the question (nobody, least of all the German people, wants it), we have to scrap the euro in its current form. A northern Europe-only euro might work but without the original political rationale it’s not clear what the point of that would be. There are some benefits to having a single currency but they’re relatively trivial in a world where IT makes it very easy to compare and translate prices in different currencies and where derivative markets make it easy and cheap to hedge currency risk (for the moment anyway).
I think there’s another aspect to this whole thing, which is a resurgent German spirit of self interest. After decades of war-guilt induced willingness to fund the rest of Europe, Germany is now run by a generation of people who have no memory of or involvement in the war and who quite reasonably see Germany as being entitled to consider its own interests, like other countries. Those interests continue to include an integrated European economy but not a political entity that depends on their constantly being the residual payer. That, plus Germany’s divergent interests in other areas such as energy policy (basically, be nice to the Russians to keep the gas flowing), means they are increasingly at odds with their traditional friends the French.
If politics cannot move forward, it may move back – momentum is everything. We may see not only the end of the euro and the political hopes associated with it, but a shift back in the whole European Union towards a more narrow economic emphasis, like the original EEC (European Economic Community or “common market”).
There is therefore a lot more at stake than merely whether, or rather when, the Greek government defaults on its debts.