Europe has been trapped in its own foolishness, incompetence and heartlessness, and will soon be forced to change to avoid dissolution.

By Grigoris Nikolopoulos

It faces three options in my opinion:

1.      Conclude the Greek bond swap program with Private Sector Involvement (PSI) –which will lead to the collapse of the bonds of the “weak” European countries and a swelling of the debt problem throughout Europe.

2.      Abandon PSI and let Greece declare bankruptcy within the eurozone; this will also lead Europe to collapse because it will be considered incompetent and unreliable.

3.      Change policy, print money and issue a Eurobond -which will lead to a devaluation of the euro but will solve all eurozone debt problems and keep it united.

I believe Europe will move towards the third option –the only one that ensures stability and cohesion- after the presidential election in France which the Socialists look like winning.

By then, it will have paid the Greek bonds maturing March with European taxpayers’ money and will have regretted that it took so long to make the right decision –that is, adopt the third option.

Here is why:

1.      If the Greek PSI goes ahead, any investor in his right mind anywhere in the world, and despite the assurances of European officials that Greece is a unique case, will immediately sell his Italian, Spanish, Portuguese, Irish and possibly French bonds. He will think –and rightly so- that Europeans were not able to solve the problem of the country that had the smallest debt –in absolute figures- and will be forced to do the same, i.e., proceed to a haircut of Italian, Spanish or French bonds.

Because everyone will sell the bonds of these countries, their spreads will skyrocket and the debt problem will balloon. Europe will be forded into a change in policy and the printing of money or will dissolve.

2.      If PSI is abandoned and Greece is left to declare bankruptcy within –or outside- the eurozone, the investors who will meet their demise because of their  worthless Greek bond holdings will sell all their other European bonds, fearing they will go down the same way. In effect, we are led to the same result. The only difference is that this will ultimately be worse for Europe, because although in the beginning they will think that it has got rid of the black sheep, they will soon come to realize that there was not just one black sheep and that Europe has not been able to manage in an honest way the debt problem of the country that accounts for 2% of European GDP. Speculative attacks on Europe will then proliferate.

3.      If Europe changes policy now and decides to print money, if it guarantees the existing bonds of all European countries and declares that from now on it will issue Eurobonds which it controls and will lend the countries in need –imposing at the same time austerity policies as in the Greek case- the pressure of markets will ultimately wane and stability will start being restored throughout Europe. The printing of money will, of course, lead to a devaluation of the euro, close to 1:1 to the US dollar or even below, but this will do no harm to any European country.

French President Nicolas Sarkozy proved too “little” to impose this correct policy on the hard German Chancellor, Angela Merkel, and her even harder finance minister, Wolfgang Scheauble, but after the French elections and the likely victory of the Socialists France is expected to change stance towards the Germans and claim a more active leadership role in Europe. European officials, like Olli Rhen and Herman van Rompuy, will lose no time in supporting the idea of the Eurobond because their existence depends on the existence of the European . Ifitdissolves, theirjobsgo, too.

The only problem we Greeks will face is if the EU changes policy after forcing us into bankruptcy and out of the euro. This is not very likely, however, as the risk of a European “accident” if this option is preferred is very high.

It looks likely, therefore, that the EU will prefer to pay the Greek bonds maturing next month in order to avert a Greek default, and then change economic policy.