There are any number of possible outcomes being discussed for Greece.
Occam’s razor says that the simplest is the most likely. So what’s the simplest?
Start first with a key fundamental: Greece is unable and unwilling to pay its debts. In light of this, its debt will either need to be forgiven or it will have to default.
Default would cause a crisis in the European banking sector and would quite probably force Greece out of the euro, creating an existential crisis for the single currency and quite possibly for the European Union.
The European Central Bank and the EU itself will not jeopardize their existence, therefore they will do everything they can to maintain the euro and, therefore, Greek solvency. The German state’s post-war sense of self is interwoven with its commitment to European integration as a testament to its resolve never to be the cause of another European war.
The EU is integral to Germany’s commitment to European peace. Therefore Germany will do all it can to maintain the euro and, therefore, Greek solvency. And as Europe’s biggest and richest state, Germany can do a lot to that end.
The sums of money required to rescue Greece are large but manageable for Europe’s rich core. But an all-out Greek rescue will trigger similar demands from Ireland and Portugal, which are in similarly dire economic straits. All three rescues are manageable. But if they all have their debts forgiven, Spain and Italy will also seek help to overcome their problems.
A full rescue of Spain and Italy is beyond what core European taxpayers would be willing or able to tolerate.
So Greece needs to be rescued without triggering an avalanche of similar demands from across Europe’s periphery. The answer is to extend further loans to Greece and to pretend that Greece will have to pay them back eventually. This rolling over of debt can be done for years on end. It’s called extend and pretend.
But it must not seem too easy. Therefore Greece needs to be seen to be paying a cost for its rescue. This cost is called austerity.
Greeks, however, do not see how such austerity can end in light of their enormous and crippling debts. For many, the benefits of staying in the euro are being outweighed by the costs.
In the absence of a wholesale debt forgiveness by the EU, Greeks will seek default. But since Greek debt forgiveness would cause a chain reaction of unaffordable demands from across Europe’s periphery, the EU will need to consider engineering a Greek default in a way that would not jeopardize the euro and the EU.
A default that affects the European banking sector would trigger a pan-European financial crisis which would jeopardize the euro. So the ECB and the EU will bear the cost of the default.
They will do so with their fingers crossed that Ireland and Portugal do not also seek a default on the same terms.
But Ireland and Portugal will seek a default on the same terms, because it is better than endless, unrelenting austerity. Spain and Italy will follow suit.
And this is how the euro ends.