Paul Krugman has a long article on the euro and its discontents coming out in this weekend's NYT Magazine. The piece (online here), ends by laying out four possible outcomes of Europe's debt crisis.
1. "Toughing it out"
Europe's troubled economies cut spending to lower deficits. Workers' wages fall — a painful process that allows the countries to export goods more cheaply. The countries industries become more competitive on international markets, their economies recover and they get their debt under control. This is basically the current plan.
2. "Debt restructuring"
basically a euphemism for a form of default. (Update: For more on the meaning of "restructuring" and "default," see the end of the post.)
Krugman, like many other observers, thinks Greece will have to restructure. Maybe Ireland, too. But the big question for the global economy is what will happen if the bigger, troubled euro countries — Spain and Italy — have to restructure.
3. "Full Argentina"
About a decade ago, Argentina defaulted on its debt and abandoned its currency's peg to the dollar. In the case of Europe, this would mean a troubled country defaulting and abandoning the euro. That would cause a huge amount of turmoil — among other things, a country that was about to leave the euro would likely face a run on its banks.
On the other hand, leaving the euro would allow a country to devalue its currency — which tends to be a quicker and less painful alternative to years of falling wages, which is the alternative.
4. "Revived Europeanism"
Turn Europe into something more like a single country. This would ultimately involve the countries that are doing better — notably Germany — providing more subsidies for the countries that are struggling. Europe would look more like the U.S. Germany, not surprisingly, has opposed this idea. But, Krugman argues, "it’s hard to see how the euro can work unless Europe finds a way to accomplish something similar."
For more: See Planet Money's coverage of Europe's shell-game bailout, Spain's banking troubles and real-estate bust, Ireland's too-big-to-save banks and how Greece's long boom.
Update: Several commenters raised questions about the difference between restructuring and default. So I emailed Ken Rogoff, a Harvard economist who wrote a book about the history of sovereign defaults. His response:
Restructuring is a form of default, in both theory and practice. Restructurings, if agreed by the creditors, constitute a more orderly default. The two sides typically agree to an extended time table for interest payment, often at a substantially lower rate.