Just as the problem on this side of the Atlantic supposedly was just subprime mortgages, a tiny sliver of the credit market where their obvious but unique abuses, the problem in Europe was supposed to be just Greece, which accounts for a few percent of the eurozone's output.
Then the Federal Reserve-engineered takeover of Bear Stearns by JP Morgan Chase (JPM) in March 2008 was thought to be a one-off affair, just as the bailout of Greece last spring was supposed to be. And for a few months, a tenuous stability returned.
In the summer of 2008, the bailout of mortgage giants Fannie Mae and Freddie Mac staved off a full-fledged crisis but failed to inspire confidence. Now, the bailout of Ireland has been ineffective in staving off contagion to even beyond the other PIIGS -- Portugal, Italy and Spain -- closer to the core. Add debt-laden Belgium to this troubled group as the cost of insuring its debt jumped Tuesday to levels paid by Italy earlier in November, 185 basis points ($185,000 annually to insure $10 million of debt for five years.)
The only thing missing in these parallel developments is the equivalent of the Lehman Brothers collapse for the Eurozone. Should such a cataclysmic event occur in the Eurozone it would probably break up the currency union. So what could this event be? Here is what Desmond Lachman has to say:
How do you see this ending?
The more likely trigger for the euro’s eventual unraveling will be in the periphery itself. Already, the Greek, Irish, Portuguese, and Spanish governments have tenuous holds on political power. A deepening in their economic and financial crises could very well result in the ascendancy of more populist governments, which might be less willing to hew to the hair-shirt austerity programs dictated by the IMF or to remain within the euro straitjacket. This is essentially what precipitated the demise of Argentina’s Convertibility Plan in 2001.
Another plausible trigger for the euro’s eventual unraveling could be a heightening of the capital flight already underway in Greece and Ireland. Ample experience in earlier fixed-exchange-rate regimes suggests that capital flight can reach such proportions that countries are left with little alternative but to restructure their debt and exit their fixed-exchange-rate arrangements.