My fellow SEJ-columnist George Irvin has made a bold prediction: Greece will be forced into default. Very soon. I agree with almost everything George has written over the last couple of years on the crisis. I also concur that the costs of a disorderly default will be huge. I am sure that he is wishing as fervently as I am that this prediction will not come to pass.
I differ in that I think it is unlikely to happen. And the reason is precisely that the costs are uncertain but likely to be very high. Every time it really comes down to it – i.e. when it is not just about keeping domestic opinion and backbenchers happy – policymakers (ECB, Merkozy) will blink. That has happened to date and I expect it to continue, for some time at least. The costs of rolling over Greek debt (less than EUR15 bn next month) are small compared with the risk of going down in history as the man or woman who blew up the euro area.
My most likely scenario is that policy will continue to drift and the situation throughout Europe will deteriorate further before more vigorous policies to resolve the crisis are implemented.
We are in uncharted waters. I might be wrong. For once in this two-year saga I hope not.