The Eurozone crisis has been occupying commentators' minds for a while but actually the rough shape of the endgame is looking pretty clear. Germany will have to give some ground.
As many have already pointed out, the problem with the concept of the euro was that it was based on two incompatible premises: that it could be as solidly-founded as the Deutschmark, and that the Eurozone could admit traditionally profligate Southern European nations without a stern set of sanctions to keep them on the fiscal straight and narrow. A maximum of one of those two propositions could hold.
If a nation runs a budget deficit, then it obviously needs a means to plug the gap. There are seven ways of doing that, but thanks to the Eurozone's economic setup they are not all applicable to the Greek crisis.
The first four are simple and obvious, but in the current situation both tricky and inadequate.
1. Sell things. Privatisation was famously derided as 'selling the family silver' by someone who should have known better, but the gains go beyond the one-off cash injection. There are longer term regular inputs from (a) cost savings as the government ceases to have to maintain buildings, plug the losses of public corporations, and pay for a bloated public sector, and (b) greater tax revenues from better-run services in the private sector. Greece is trying to embark on a €50bn privatisation programme, but it will be politically unpopular and may well split the PASOK government.
2. Spend less. Cuts in services are an obvious way of bridging a deficit, but the result is political unpopularity, and in the Greek case riots in the streets. It is obviously problematic, as the big savings are to be made in reductions in health, social security and pensions. As Simon Jenkins pointed out which his usual pithiness, it is rational for the Greeks to reject this option as their riots make European bailouts more likely.
3. Tax more. Fine in principle with a growing economy, but risky when the economy is faltering; taxes could stifle recovery. Greece does admittedly have a serious problem with tax evasion, with €15bn being at the low end of estimates, so there is some scope here. Even so, cracking down on evasion can be just as stifling as (though certainly fairer than) increasing taxes.
4. Borrow it. Fine if your economy is not so crummy that the cost of borrowing is already through the roof. When this crisis started, the ten-year Greek government bond spread over German Bunds was a colossal and unsustainable 4 percentage points. Ouch - except that now the spread has risen to about 14.
Things would be easier with speedy economic growth. Taxes increase and public spending falls, so it automatically leads to an application of (2) and (3). That is what cleared the massive European war debts after 1945. The problem is that the Greek economy is not likely to grow much since it doesn't produce anything that anyone wants to buy. Cutting public spending early is likely to suppress growth, but if the government is the only driver of growth the situation is unsustainable anyway.
The problem with all these four methods, even in judicious combination, is that they are nowhere near sufficient to plug Greece's massive debt once the interest payments that are accumulating are taken into account, as The Economist pointed out once the scale of the crisis had become clear in a pair of articles that reckoned, on fairly generous assumptions, that the likely level of Greek government debt by 2014 would be an eye-watering 149% of GDP. No way could these first four methods make serious inroads into that.
So, even given that the Greeks improve or even eliminate the primary budget deficit, the interest payments will still be unsustainable. Hence we get into heavy politics, because the final three methods (unlike the first four) cannot be implemented by Greece alone.
5. Inflate the debt away. Had Greece not been in the Eurozone, this is what it would have done by printing lots of drachmas. The result would have been inflation, but that is a large future cost which democratic governments usually find easier to contemplate than smaller costs incurred in the present. But even though Greece has no drachma, this could still be done by allowing the euro to inflate (presumably by raising the ECB's inflation target). This will require broad agreement.
6. Let someone else pay. The IMF will, but will demand painful conditions. A fiscal transfer is often used in a monetary union (e.g. the US regularly channels money from rich states to poor ones). In this case, the result is that hard-working North Europeans, particularly the Germans, will be paying for Greek profligacy. This is the current approach, but how long will voters wear it? The True Finns, populists who oppose bailouts, recently got 19% in the Finnish election; one can't imagine Angela Merkel carrying on forever.
7. Can't pay, won't pay. Default is the effective solution, though it will obviously raise borrowing costs in the future.
Which of these methods will be used? The Germans are inclined towards (7) for obvious reasons. Borrowing costs will be raised across the Eurozone, but not uniformly; the best-run economies will suffer less. Great for Germany, but not so great for France (and terrible for Greece and Italy). The French will block a default for as long as they can, with the help of their man in the ECB. If the Germans cannot force a default through under the guise of a voluntary debt rollover, then the bailouts will have to continue unless the euro can be inflated or Greece leaves the euro and inflates its own currency. The Germans will have to accept more bailouts, or more inflation, or a disentangling of the union.
Contrary to some comments, there is nothing particularly flawed about the euro's set-up in itself; it just couldn't possibly have functioned as advertised. It was never going to be as strong as the Deutschmark, despite what was said to German voters in the 1990s, and the cost of the pretence that it is a strong currency in a uniformly responsible monetary union will have to be borne by Germany one way or another. Economically, the Germans are right, but politically they have ceded too much ground already to be confident of holding their position.
Neither a lender nor a borrower be, said Polonius, and Angela Merkel would probably agree. Sadly, like her predecessor, she will probably be stabbed through the arras as well.