Former ECB member Lorenzo Bini Smaghi has a sharply worded op-ed in the FT that basically says: Greece’s demand to renegotiate its bailout while staying in the Eurozone is ridiculous, but that if Greece is forced out, the devastation will be bigger than anyone appreciates….there is no doubt that if Greece leaves the eurozone the contagion will be devastating. Those who suggest that markets are now well prepared for such an event and that most of the costs would be borne by the Greek economy seriously underestimate the channels of transmission of systemic crises following a sovereign debt crisis and a bank run. As we saw after the fall of Lehman Brothers, quick decisions would have to be taken to set up credible firewalls and stop market panic. The US Congress had to adopt the troubled asset relief programme, used to recapitalise all banks in a coercive way, and the Federal Reserve implemented its series of quantitative easing.
The most interesting part is where he takes a swipe at… France:
The only way for Europe to protect itself against the irrational behaviour of Greece is to strengthen its own institutions and rules. So far, the main opposition in the eurozone has come from France, which has systematically striven to preserve the inter-governmental nature of the eurozone decision making and to contain the powers and legitimacy of the European Commission and European Parliament. Several countries, including Germany, have made different proposals, with a view to increasing the federal nature of European institutions.