More On The Eurozone

In case you haven't been following events in Europe, things aren't looking so good. The UK is in a double dip recession. The government of Holland has fallen over proposed new austerity measures. The Greek government has been voted out of office. Spain has 23% unemployment, with unemployment among young workers at 50%. The cost of borrowing by the government of Italy has risen. President Sarkozy of France was defeated by a socialist who does not support further austerity.

At the end of this month, Ireland will have a referendum on whether to accept a new EU treaty imposing greater control of fiscal policy from Brussels. By the way, Ireland has declining GDP and high unemployment.

So where does Europe go from here? Some knowledgeable observers expect Greece to fall out of the Eurozone as early as next month. Here's Paul Krugman's take:

"Some of us have been talking it over, and here’s what we think the end game looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
And we’re talking about months, not years, for this to play out."

In any event, it looks like the future of the Eurozone is mostly up to Germany, but may be up to European voters.