There's an interesting argument from Arvind Subramanian in the FT this morning. He says:
Default will be disastrous for Greece and the resulting contagion would be damaging for Europe. So goes the conventional wisdom. The only debate has been about the strength of contagion and the appropriate response of vulnerable countries and of the cheque-writing country. Might the debate be misguided because the premise is flawed? Expelled from the eurozone, Greece might prove more dangerous to the system than it ever was inside it – by providing a model of successful recovery.
The whole article is worth reading.
His point is a serious one: after a period of extreme misery (and grant aid for the relief of poverty and maintenance of essential services in Greece will be essential if its people are to get through the two year period following withdrawal from the Euro) Greece will recover. At the very least Greek holidays will suddenly become very cheap and export markets such as tourism should grow again after the horrible interregnum, quite rapidly. Argentina, Iceland and others provide the precedent, uncomfortable as the ride is.
But the other side of the coin is as important. As Greece recovers, and if Spain, Italy, Portugal and Ireland follow it and also recover, the cost will be born by someone and that someone is Germany. They'll no longer have massive capital inflows and so low interest rates as the safe haven of Europe. Their banks will lose, badly - as they had the money to lose. And Germany will no longer have guaranteed export markets with efficiency differentials built in that bias towards the productivity of German labour.
The short term pain of Greek exit will be in Greece - and serious aid operations as well as rapid lessons in the management of capital controls will be needed very soon I expect - but the cost will eventually be on Germany.
The difficulty is persuading the Germans of that. It's taken two years for the people of Europe to rumble the madness of austerity. Can the Germans send Merkel a strong enough message before Greece defaults? That's a big question.