Predictions for France

France will be occupied by Socialist once again...

I would make a detailed response, but I am le tired. The Chinese will fire ze missiles.

I thought this was going to be about football...

The only reason there wouldn't be anyone to pay for the bills is because France doesn't have it's own currency... (same issue with Spain and Italy) and thus their government is constrained when it comes to financing deficit spending, infrastructure and social programmes and other investment should it so choose. That's the issue in the short / medium term, not whether their government is socialist or whatever. I'm sure they'll have some wacky policies, but hopefully they have a chance to break free from the ideology that they should have austerity now or that banks know best. They will still face the harder (intractable?) problem of not having their own currency though. That situation doesn't change regardless of who is in power.

It will be interesting to see how Franco-German relations play out given the escalating Euro crisis and having two of the largest countries in the common currency zone with opposing economic requirements and potentially political ideologies.

The idea that France will be a vassal state for Germany if they part ways is ridiculous (one is a €2.5 trillion economy, the other a €3.2 trillion economy with similar GDP per capita). There will be no EuroZone and each will have their own currency and will be able to pursue austerity or expansion as they please. What do you think will happen to Germany's banking sector if Spain, Italy and France leave the EuroZone? Will their government let the banks take a hit, or will they backstop them and end up socialising their debt Ireland style? If the German banks do have to de-leverage, will their government pick up the slack and invest or will they have "austerity"?

I do not think France will be subservient in the grand scheme of the future European economy, just the really weak southern states.

When Germany decides to leave, and it will be driven by a popular uprising (think Tea Partyish) not through the established political class, two things will happen simultaneously: the core countries will have to decide whether they will follow Germany (which, I think they will) and the peripherals will have to decide whether to keep the EMU together (which I also think they will, to include France....at least for a time).

The driving factor of the entire dissolution of the Euro will simply be through the simple bailout exhaustion of your average, hard-working German taxpayer and his/her peers in Austria, Finland, and the Benelux countries. Hopefully, banks in those countries will have both delevered as well as reduced their exposure to sovereign debts of the peripheral countries. If they have not, the Bundesbank (and its peer central banks in the other core countries) will have to step in with a TARP-like bailout to ensure that the balance sheets of their domestic banks are as strong as possible.

France will initially stick with the Euro as now they will be its strongest member. Hollande, or whoever is president of France at the time, will achieve the Gaulist dream of a French-dominated pan-European currency block. Now removed from the inconvenient influence of their neighbor to the east, they will use the Euro to monitize the debts of the peripheral countries as well as finance their own socialistic programs. The question is, will France allow the Euro to continually weaken in order to support the profligacy of its Mediteranean partners, or well they all go merrily along monetizing and inflating? That is a much harder question to answer.

It all comes down to the fact that the countries in Europe are just too different to have any meaningful type of union, be it fiscal, political, or monitary. They have fought more than a few wars over such things, if I remember correctly.....

Another interesting thing to think about is how a European free-trade zone will look (Basically, the bastard-child successor the the EU as a whole). While the core EMU countries will definitely become a part of it, I would expect Denmark (who would have abandoned the Kroner's peg to the Euro) to obviously be a part and there is also a good chance that many former communist countries will join as well, especially considering their adherance to their individual austerity measures.

Basically, does anyone think that Greek/Italian/French/etc. people will allow decisions on their budgets, retirement ages, etc. to be made in Berlin? NFW!!! Does anyone think that Germany will keep throwing money at the peripheral countries everytime they come to them hat-in-hand? NFW!!!

Barring some major reversal in different country's attitude toward this, Germany is done!! Might take 5 years, but they are eventually going to lose patience and leave.

I don't know if I agree with you on a lot of your assumptions. Greece's government profligacy and corruption is a red herring and is confusing the real issue of the EuroZone.

The whole characterisation of hard working Northern Europeans Vs. Slothful Southern Europeans is mistaken, the current condition reflects the fact that monetary policy over the past 10 years in the EuroZone has been set in accordance with Germany rather than other European countries due to the size of it's economy and it's political weight. This ensures that EuroZone wide monetary policy is procyclical for economies that are not in lock-step with Germany, even those that had performed better.

In the early 2000s Ireland's economy was roaring, but they couldn't cut taxes for fear of inflation because they had to deal with an overly aggressive monetary policy by the ECB due to Germany's sluggish growth in comparison with the Celtic tiger (as Ireland was referred to then) which had high growth and low unemployment. Because of sharing a currency with a laggard Germany, they ended up having severe asset price inflation which exacerbated their financial crisis post-Lehman. A financial crisis that was born in the private sector and not from Government profligacy. The only mistake the Irish made (apart from joining the Euro) was that they nationalised their banks without wiping out major private creditors (domestic and foreign). If they had let their banks fail or restructured them in a form where the private sector creditors took a hit, it would have sent a clear message to Berlin about what is wrong with how the Euro is set up. Instead they acquiesced to European / global pressure. Now the Irish are forced into a couple of generations of austerity when they had done everything their European elders had told them to do.

The situation with Spain and it's banking sector is somewhat similar although Spain is a much larger economy and has other issues/factors. Their government is robbed of their fiscal expansion tools and they are drained of their liquidity because they share a currency with Germany. If Spain had it's own currency, it wouldn't need any bailouts. The UK nationalised great swaths of it's banking sector. The UK government didn't need Merkel's permission. It issued debt and it's 10 year rates are nearly as low as your beloved Germany even though Germany is seen as a safe haven for Euro denominated bond investors. Yet a lot of the fuss in the press / markets this week has been about Spanish banks needing a €60 - 70 billion bailout. That's such a puny number considering the chaos in the news. Spain's GDP is €1.4 trillion p.a. To put things in context, Royal Bank of Scotland's real estate portfolio alone was €70+ billion at the time it was nationalised by the UK government. It's only a big deal because Spain doesn't have it's own currency. It uses Germany's. No amount of ECB money printing will counter this. And if the time comes and Germany has to bail out it's banks, it won't be such a safe haven and could see investors feeing it's Euro denominated bonds in search of safer Euro denominated assets.

I do agree with you that the EuroZone looks like it could face an existential crisis (although I'm not a betting man). As much as the Euro-politicians want it, I don't see them gaining the political capital to have centralised European borrowing or a pan-European backstop of the commercial banking sector.

The reality is no government is going to decide to leave the Euro currency. It would be political suicide. It will be something that the markets will force, like the Pound leaving ERM in 1992, but with far uglier ramifications. I think the trigger will be a large economy like Spain facing the prospect of EuroExit.

There is a misconception about the common market. The EU extends beyond the countries that use the Euro as a currency. The UK is part of the EU and the common market.