The Eurozone Endgame: Four Scenarios

In the aftermath of the Irish bailout, the German proposal for a future sovereign and/or senior bank debt restructuring mechanism within the eurozone makes complete political sense to the electorate in stronger European countries. They do not want to write "blank checks" to weaker countries and to out-of-control financial institutions going forward; creditors to countries that run into trouble will face likely losses.

While the details of this "burden sharing" approach remain to be hammered out (after Sunday's announcements), there is no way for German or other politicians to backtrack on the broad strategic principles. But once this arrangement is in place, say in 2013 or thereabouts, all eurozone countries will (a) be able to sustain less debt than has recently been regarded as the norm, and (b) become vulnerable to the kinds of speculative attacks in debt markets that we have seen in recent weeks - to reduce funding rollover dangers, they will all need to lengthen the maturity of their outstanding debt.

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