The troubles in Europe could play out in a variety of ways, but economists see a few main tracks. Here are three broad scenarios, outlined by Willem Buiter and Ebrahim Rahbari of Citigroup.
Option 1 is "fiscal union." This would mean that a growing measure of fiscal authority is transferred from individual eurozone nations to some central authority. Just as the US issues Treasury bonds for the federal government, this fiscal union might issue "Euro bonds." If nations pool their resources, the government debts of the weaker ones could be financed at low interest rates. But a move in this direction faces big political hurdles.
"The appetite for further political integration and ... potentially uncapped and openended cross-border fiscal transfers is running low," even among the political elite, say Mr. Buiter and Mr. Rahbari.
Option 2 is "breakup." It's the polar opposite of fiscal union. Financially weak nations could exit the eurozone, suffer the consequences of default on their debts, and move on to try to restart their economies. But Buiter and Rahbari argue that the costs of breakup, coupled with the political capital that nations have invested in the eurozone, make this outcome unlikely.
Option 3 might be called "muddle through." This scenario is the most likely one in the eyes of the two Citigroup economists. The nations would stop short of fiscal union, but would take enough coordinated action to quell the crisis, and impose costs on creditors and debtors alike. Buiter and Rahbari call this model a "You break it, you own it Europe." This setup would include funds to provide liquidity to nations and private banks, restructuring plans for high-debt nations, and measures to avert private-sector banking failures. (The steps could include restructuring banks or supporting them with capital – as America did with its TARP fund in 2008 – when the banks are forced to take losses on some of the sovereign debts they hold.) But bailouts would be limited.
The third option might allow the European Central Bank to step back from its unwanted role as a backstop amid fiscal troubles.
The "muddle through" plan could also include some special-purpose bonds backed by the eurozone nations collectively.
Measures that eurozone nations have already taken could be seen as first steps down the path of Option 3. A key question, if this route is taken, is whether steps will be strong and swift enough to change the climate of crisis.
