The Euro and precommitment

It's not the major problem, but one neglected aspect of the Eurozone crisis is simply that countries such as Greece and Portugal cannot precommit to stay in the Eurozone forever.  So markets start wondering whether or when they will leave.  That makes it harder for them to borrow (markets expect a currency devaluation), which turns up the pressure for them to leave.  It also makes it harder for their financial intermediaries to stand on a permanently sound footing, given that deposit liabilities may not stay denominated in terms of Euros forever.

If Greece and Portugal were out of the Eurozone, few people would speculate on their imminent return, and so that state of affairs is more likely to have consistent (if sometimes bad) expectations.

Once something like this is up for grabs, it is often wiser to bet on the outcome associated with the more universally consistent expectations, whether or not you think that outcome is a good one.

Of course the market is also familiar with this logic, which in turn makes it yet stronger.  It also means that tips and flips of sentiment can enforce runs and speculative attacks very quickly and at not-fully-predicted times.


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