June is going to be even warmer than usual, not only in the Med, but across Europe. If the ‘anti-Europe’ parties win the re-vote in Greece, the EU and the ECB in particular will have to unsheathe whatever secret weapons they have prepared in order to prevent the great recession turning into the great depression of the twenty-first century.
There are three main outcomes following a ‘bad’ outcome in Greece. The most likely, but just, is still that the ECB and the EU will step up to the plate and do whatever it takes to keep Greece in the Euro despite the vote. This will have to include agreeing to much softer bailout terms, debt forgiveness, quantitative easing, and other novel weapons.
The second possible outcome is that Greece is allowed to leave the Euro in an ‘orderly’ fashion, i.e. with the cover of many of the same actions described above save of course for the softer bailout. The objective will not be to help Greece but to attempt to stop the rout by the Balkans and prevent a Southern European contagion. This will probably be a short term solution.
The third possibility is that in the context of a disorderly Greek exit, the ‘hard’ countries, led by Germany leave the Euro and adopt some new version of the DMark. This will have the effect of mitigating the depreciation of the ‘leftover Euro’ and of curing the problem of the two speed euro once and for all. Strong countries will adopt the new DM and be under German orbit, while the Med and others will have a ‘weaker’ common currency.
Clearly, all solutions save for one where the Euro remains in its current form with its current members will generate short term disruption in a scale that hasn’t been seen in most people’s living memory.