Making matters even more complicated is the steady drumbeat of news making it incredibly difficult to comprehensively assess the situation, since Europe is very much in flux. Throw in the many factors at play — from the fallout for financial stocks to bond markets to European import trends, just to name a few — and it’s no wonder the global markets are so uncertain.
But here’s the thing: Unless you are a very active trader looking to pinpoint specific areas of risk and opportunity, there’s little to be gained from having your eyeballs glued to the headlines. The fact of the matter is that despite the many moving parts and varied scenarios, there are really only three ways the EU debt crisis can end.
Yes, the devil is in the details — and with 17 euro-denominated member states with their own political agendas, those details aren’t going to be easy to hammer out. But if you are more concerned with the possible endings to this mess than the constant action of the present, here are the bottom-line scenarios:
Scenario 1: The EU and Euro Survive
General Result: This is the best-case scenario, and the one France and Germany are most hopeful of achieving. Whatever the specifics, the European Union will remain unified under a joint currency and provide stability. In a perfect world, the EU maybe will even emerge stronger than before.
Some Items at Play: All governments must be OK with strict borrowing rules for this to happen. Member states and their voting publics also will have to be OK with bank bailouts. And most importantly, after this is done, confidence needs to return as businesses and EU consumers spend again and grow Europe out of its debt troubles and current recession.
Variations: Survival of the European Union doesn’t mean that the status quo needs to persist completely. Movement away from individual countries issuing sovereign debt and toward a “eurobond” system could be part of the plan. This will spread the risk of borrowing around the continent to prevent such a crisis from occurring again. Another variation would involve a fully integrated political union as well a monetary union. We’re talking a government with clout here, which would not only focus the region on collective desires instead of national interests … but would prevent some of the messy local politics we saw in Greece and elsewhere, since governments will be formally aligned on a higher level.
Benefits: Confidence is the No. 1 takeaway here, since avoiding a breakup will provide stability to businesses and investors. Also, no country has to deal with devaluing its currency or wandering in the wilderness until it gets its act together.
Risks: Inflation is the biggest problem here, since the euro already is plummeting and the European Central Bank will have to print a boatload of cash to prop up the continental system. There also is a risk that governments won’t clean up their spendthrift ways after a bailout, having proven that they will be given a leg up if they overreach. And if inflation gets out of control, the result could be an intact EU that has to deal with years of economic hell as businesses go bust and wages can’t keep up with inflation.
Scenario 2: The Eurozone Sees a Partial Breakup
General Result: Rather than throw their lots in together, the European Union essentially puts some or all of the problem nations on an iceberg and pushes them out to sea. That creates a two-tiered eurozone where some avoid the worst repercussions of the breakup and some take it right on the nose.
Some Items at Play: Where to draw the line on the breakup and how clean the break are the biggest issues in this murky scenario. For instance, would the breakup be precipitated by popular uprisings, such as Irish voters blocking austerity at the ballot box and thus opting out of the eurozone? Or would politicos be the ones throwing in the towel, or pushing peers out of the EU club? Would the “new” eurozone be formed in one fell swoop, or would “old” states slowly drop out over time?