Unfortunately, there is not only one variable to consider but, instead, there are four of them: the financing of budget deficits; the refinancing of maturing sovereign debt; the financing of current account deficits; and – most importantly – the financing of capital flight.
The financing of budget deficits is peanuts compared with the other three variables. In the case of Greece, we are talking about the petty sum of roughly 20 BEUR annually (and that includes high interest expenses, and the sum is declining). Add up all the budget deficits of the Periphery and tax payers of the Core would sleep well knowing that this is all they are in for. As I said, peanuts.
The refinancing of maturing sovereign debt is a bit more scary. But it is also the silliest variable. Refinancing debt is not something which represents failure. If the best corporations of the world could not refinance their debt, they would be out of business in no time. The refinancing of debt has only become an issue because private creditors have begun to think (or rather: have been allowed and encouraged to think) that they have a right to have tax payers take that debt off their shoulders. A supremely wrong assumption! Unfortunately, an assumption which, so far, the political class of the EU has proven correct.
Everyone, particularly sophisticated financial commentators, gets very excited about rises in yields on sovereign debt. That is silly! It is absolutely irrelevant for a country like Spain what the secondary market yields on its debt are! The only thing which matters is at what rate the country can borrow if and when it needs to borrow and that is, absent all other solutions, in the final judgement of the Troika and the ECB. There is absolutely no need to demonstrate that a country can meet all of its obligations until doomsday. All a country needs to do is to meet the next obligation!
The continued financing of current account deficits by the ECB is a serious issue because it allows “overvalued” countries to live beyond their means. They will not stop that unless they are forced by financial constraints to do that. If those countries were deprived of current account financing, they would have to import less and, above all, they would have to think about import substitution. If they did that, they would quickly increase domestic economic activity! A sign-off on globalization? In a way, yes. But if globalization causes damage, that damage needs to be constrained!
And, finally, capital flight. That is the killer-app! If things keep going the way they are under the present Euro-structure, all national deposits of the deficit countries will eventually end up in foreign bank accounts and all national banks will be refinanced 100% by the ECB. That is where the big numbers come into play. Would that be wrong? Not really, if each national economy remained in the Eurozone and if each national economy would eventually make it.
BUT: if only one national economy did not make it within the Euro-structure, all hell would break loose. Tax payers of the surplus countries would realize that they have financed the capital flight of the wealthy class of deficit countries. Those tax payers would have to write off their claims and, at the same time, they would watch how the wealthy class of the deficit countries could enjoy the continued value of their assets which was financed by tax payers.
That is the real Achilles nerve of the Euro-structure as is! What is the solution? If nothing else comes to mind — capital controls!