Preserving the eurozone

The BBC tells us that the Portuguese are voting "amid austerity".

It's a bizarre notion that austerity in Portugal has got off the ground. The economy "is expected to contract by 2% this year and next".

Of course their politicians have the easy answer of politicians everywhere.

We are going to cut state waste and excesses while finding a way for the needy to get what they need.

Right. Increasing spending then.

Andrew Lilico has a pungent piece in The Telegraph about Greece (read it all), reminding us that

The Greeks have a long tradition of defaulting, having been in default for about half of the years since the modern Greek state began in 1830. Lending money to Greece is not an investment. It is an act of cultural charity, a participation in the myths of Athens and Sparta.

Myths, we may add, with a diminishing grip on other countries' rulers. Greeks, says Lilico, are unlikely to feel a moral obligation to repay their debts, and even if they did they couldn't manage it.

The only question of default isn’t whether Greece itself pays – that ain’t gonna happen. It’s whether Germany and France decide to pay Greece’s debts for it, as a way of bailing out the German and French banks. For a while that seemed plausible. But what seems much more likely now is not that Germany and France pay off the debts; merely that they help Greece meet its interest payments for a while so as to put off the formal moment of default until it seems like the German and French banks might be able to take the hit.

Returning to Portugal, they are down a hopeless hole too. The core eurozone countries will be seeking a relatively painless (to them) way to throw out those on the margins. Italy may well make it through - whether Spain will is anyone's guess.

The longer the eurozone core can delay before marginal countries have to peel off, the longer the markets will have to get used to the idea that it's inevitable, and the smaller the political convulsion is likely to be. Indeed by next year the defaults may be greeted by shrugs of inevitability. It's about managing expectations, as well as banks' balance sheets.

On the other hand.... If you are leader of a eurozone country in trouble, why would you push your country into a pointless recession now, ahead of the inevitable default and devaluation? Why would it not be better for your country just to bite the bullet now?