I see there as being five potential ways forward for the Eurozone.
They could try to pretend, for a little longer, that there is no real problem, schedule a grand meeting in a few months at which they promise it will all be resolved, put in the smallest possible loan to pay off the next Greek (Spanish? / Portuguese? / Italian? / Belgian? / French?) debt repayment / interest payment, and see whether something turns up. One can never say truly definitively that this can't work, until it doesn't. Who knows – when, by this time next week, it has been announced that a huge new goldmine has been discovered in Portugal, a Greek has discovered the cure for cancer, and an Italian has discovered energy-generating fusion power, things might look very different.
On the other hand, (improbable though it may seem to those already committed) there's always the off chance that some miracle doesn't materialise, in which case delay-and-pray is going to look like just as stupid, expensive, and incoherent a strategy as it has looked for the past year (indeed, two years, given that the sovereign debt version of delay-and-pray is simply a re-branded version of the financial sector delay-and-pray we've been doing since mid-2007, was arrogant folly, verging on madness, since mid-2008, and was obviously folly since mid 2009).
What else might we try?
Those of spartan tastes might fancy the "cleanse" strategy. It would be possible, if unpalatable (and nothing is terribly palatable from here) to abandon all banks and all governments to themselves. There would be epic defaults across the EU, and the European Central Bank would go insolvent, but the authorities could tough it out, recapitalise the ECB, print quite a lot of fresh new money, raise interest rates to accelerate the purge, encourage new banks to replace the old (perhaps even offer a little government money to assist) and replace the bust financial sector with a shiny new solvent low-debt one.
Given that in some Member States we might be talking about a further 10% to 20% contractions in GDP, and up to ten percentage points increments in unemployment rates, with almost nothing left to mitigate the social impacts, albeit much more rapid recovery in later years (as we see from the current models of Iceland, Latvia and Kazakhstan – or indeed the US in the 1950s), there would obviously be the outside chance of bloody revolutions in a number of EU Member States, perhaps even communists or fascists or religious fundamentalists of one brand or another taking over, but maybe they had it coming. With a sufficiently "liberal" interpretation of the Charter of Fundamental Rights and the requirements for EU Members to abide by the European Convention on Human Rights, we might even brazen through with all current Eurozone and EU Members, despite constitutional overthrows.
I told you it wasn't very palatable. Let's assume we fancy this even less than delay-and-pray. "Give me more options!" OK.
The Finns and Slovakians and Germans could decide that, actually, they didn't mind working hard and paying their taxes so that Greeks could retire much earlier than them, not be terribly productive in the meantime, that the rich Greeks could not bother paying their taxes, and instead lie rather a lot and borrow from financial markets on the basis that "Those sucker Germans / Finns / Slovakians will pay in the end – you know they will." Or perhaps, instead, we could kick out the Greeks and tell the Portuguese and Italians that we'd pay their debts (despite having signed lots of Treaties saying we wouldn't) provided that Germans and Finns and Slovakians were put in charge of overseeing all their budgets in future and that it would be up to the voters of Germany and Finland and Slovakia to decide whether the Portuguese or Italian health service should approve that drug, or transport ministry build that road, or education ministry fund those students, not the voters of Portugal or Italy.
This sounds like a fabulous idea to anyone that is exposed to Portuguese or Italian debt, but unaccountably happens not themselves to be German or Finnish or Slovakian or Portuguese or Italian. There is just the outside chance that the folks of Germany, Finland, Slovakia, Portugal or Italy might have some influence over whether this actually happens. So whilst it obviously is a fabulous idea (it occurs in fables), perhaps, just for the sake of continuing our interesting discussion for a while, we should ponder whether there's anything else we might try.
4) Single Confederate European State
Another option would be to follow through the logic of the European Union and the Single Currency, and establish a confederate Single European State. They might be able to get away without calling it that, but probably they would have to be explicit. It couldn't include all current members of the Eurozone. From here, I suspect it couldn't include Greece, Portugal, Finland or Slovakia. Greece because it's going to be ejected from the euro in virtually every possible world (Wheeler-Everett-ian or nay). Portugal because it doesn't seem plausible that a country in which twenty percent of the population votes for overtly Communist parties could possibly accept the level of foreign imposition that this option requires. Finland and Slovakia because neither of them has sufficient pan-Eurozone communitarian spirit to endure under this scenario (they wouldn't cough up the cash for Italian regions, for example).
For those that are in, we wouldn't need to bail out governments any more than within the UK the central government needs to bail out local authorities such as Liverpool City Council – for that is all Member State governments would be under this structure. If an individual "local authority" (e.g. the government of the Netherlands) chooses to default under this scenario, that has consequences of course, but only like the consequences of a default of a municipal authority in the US. There would have to be rigidly-enforced deficit and debt ceilings, policed from the centre (e.g. if any Member State government wanted to run a deficit of above 2% of GDP, it would need explicit permission, in advance, from Brussels). Over time these would fall (I envisage the maximum permissible debt level for a Member State falling to around 20%-30% of GDP).
The centre would need some modest additional tax-raising powers, and be able to take on its own modest debts. The system of EU structural funds would have to be greatly expanded (that's what the extra taxes would be spent on). So, competitiveness issues associated with the euro (e.g. for some regions of Italy) would be addressed by long-term regional transfers. The key difference of this option from the transferunion is that these transfers would not be to Member State governments. It would not be the Member State governments that would decide how these funds were spent – Brussels would do that directly.
This option might also require the abolition of all Eurozone Member central banks, with all prudential supervision and liquidity issuance coming direct from the European Central Bank. But since the Member States would be explicitly only regions of the Eurozone, that might not matter. It is just plausible that some sort of regional quasi-central-banking structure, similar to that in the US, could survive, but I think that from here that might not be credible. A pre-commitment to abolishing Member State central banks might be required to provide markets with confidence, along with a reduction in the number of members and a credible, sufficiently large, programme of regional transfers funded by centrally-raised taxes (EU-centrally) administed by Brussels. Along with the abolition of "national" central banks, I suspect we would see a bringing-forward of the European Commission's bank resolution procedure (with bail-ins) and mass conversion of bank bonds to equity across most of the Eurozone.
Personally, I think some variant of this (probably not all done immediately) the most likely ultimate result. But of course there's another option.
5) Abandon the Eurozone and EU
We could, of course, break up the euro. By "break up the euro" I mean any scenario in which any of Italy, France or Germany isn't in a currency union with the other two – Greece is, of course, going to be ejected from the euro (or choose to leave first) come what may. Don't underestimate what follows. A disorderly break-up of the euro, associated with an unwillingness to enact either a transferunion or a Single Confederate State will very probably mean the end of the European Union. The European Union (along with its forerunners) has been the politico-economic governance structure for the core six original members for getting on for sixty years. Disorderly, sudden collapse of the European Union would be an economic catastophe of unfathomable proportions.
We would see the Member States of the European Union establish themselves as independent countries. They would raise tariff barriers against each other. Most of them would introduce huge additional regulations, favouring domestic businesses. They would nationalise a number of industries. International trade within the European Union would contact by perhaps a third or more. International travel within the Eurozone would collapse. Cross-border studying would collapse.
None of these things is any kind of constitutional or economic necessity – the European Union isn't the only way to deliver free migration, no tariffs, free markets, etc.. But in practice for most EU Member States the reason they do things the way they do is because of the European Union. Do not make the mistake of imagining that the way the United Kingdom might choose to conduct itself outside the EU – perhaps, though not inevitably, being even more free-trade, even more deregulatory, even more open than it is in the EU – is the way that France or Italy or Bulgaria or Poland would choose to conduct itself without Brussels to constrain it. For the vast majority of the European Union, Brussels is an enormously pro-market, pro-free-trade, anti-regulation force. Frequent assertions to the contrary on the lunatic "Bilderberger fringe" of the Europhobe movement are simply ignorant. Be in no doubt: collapse of the European Union would mean a sudden collapse in intra-EU trade, and would be a major economic event in which Britain, as a large exporter, would inevitably be caught up.
OK. So I gave you five options. Which do you fancy? Personally, I'm going for option (4). But the odds on (1) followed suddenly by (5) have recently shortened dramatically. Let's hope someone sees sense soon.