The Day After... Italy.

[ag]

I disagree, but I don't want to get into a long discussion now. Let me just restate that I think there is a strong chance such an action would result in a higher-valued Euro than the alternative of continued deepening of the crisis.

Long term it is going to destroy the euro. Gustaf here is absolutely on the point. In fact, any European (not just Southern European) government that refuses to borrow to the hilt and then blackmail the ECB into printing more would be irresponsible to its own voters: the negatives of such an action would be spread all over the euro zone, while the positives would all be concentrated in the debt-issuing country. The outcome would be to make euro a weaker currency than drachma would be on its own. It's quite likely that euro members will have to borrow in Swiss franks, pounds or dollars. You really think Germany would want to stay in such a euro zone?

And, yes, the only alternatives are either political and fiscal integration (the latter is not possible without the former), or tough balanced budget amendments to euro countries constitutions. Both are pretty difficult and (especially the latter) not necessarily desirable.

[ag]

But what evidence is there that European governments would "borrow to the hilt" as you say, and then "blackmail the ECB"? You talk as if European governments were rabid animals without restraint or intellect. I give them more credit than that. Surely they would see that what you describe is a tragedy of the commons scenario and not do what you say.

They'd see the tragedy of commons, but you will have taken from them the only mechanism out there to prevent falling into it. That mechanism right now is the merciless ECB, that won't budge no matter what and the implicit threat that the "misbehaving" country will be treated like Greece is treated now. Take those away without providing other mechanisms (i.e., political and fiscal integration) and you create the situation in which any "responsible" government would, in fact, be grossly irresponsible to its own voters - it would be letting the others to suck them dry.