Euro Zone Falling Apart?

In his post on Credit Writedowns yesterday, Edward Harrison asserted that "Greece will exit the euro zone." I agree.

The conflicts inherent in the European Union are insurmountable in an economic crisis like Europe is going through right now. Look (channeling President Obama), I'm not an economist, much less an expert on the particulars of the Lisbon Treaty. But I believe Mr. Harrison is spot-on:

I have argued for 18 months now that there are only three options for the euro zone: monetisation, default, or break-up....The euro zone is unworkable in its present form because it is predicated on harmonised national fiscal and economic policies that are supposed to obviate the flexibility that a sovereign national currency affords. That harmonisation has never existed for the euro member states nor do I believe it ever will. And that means that the euro zone will always be beset by crises during economic downturns....

Put simply, the euro zone is made for crisis. It is designed to fail....[However], unravelling the euro is a very difficult task. And so, I believe political inertia alone will help see the euro through for most countries unless we see a catastrophic banking system collapse.

 Harrison calls out three bullet points to support his (initial) case:

• Greece can’t make it. Last summer I wrote why Greece will be cut loose, predicting that Greece would default. But, it was soon apparent that Germany may also be preparing for Greece’s exit from the euro zone. While reports on this were just hearsay about contingency planning, Angela Merkel, Germany’s Chancellor has made clear repeatedly since that Greece is expendable and that her goal is to ring fence it by insulating the rest of the periphery from what happens there.
• Greece will exit the euro zone. I wrote a trilogy of posts on this in February. See Running through unilateral Greek exit scenarios, How and why Greece will leave the euro zone, and The political economy of a Greek default (and euro zone exit).
This is what has happened with the Greek election. Greek politicians now have a mandate to throw off the austerity yoke. If this results in loans being withheld, the political mandate for a Greek exit is likely.

• France has a mandate to redesign the institutional framework to include growth. The election in France does not mean that austerity is over. Again, Europe has not voted no on austerity. The election will shift policy but the shift will be less than the media frenzy suggests. What will happen is that a "growth compact" will be bolted onto the stability and growth pact, ending in a temporary relaxation of the 3/60 Maastricht deficit/debt hurdles. Nowhere is there any evidence that a seismic shift in policy is about to occur. Baby steps.

Ed Harrison is one of my top follows on Seeking Alpha and on Twitter. If credit markets matter to you, you should follow him too. Hey, that rhymes!