The eurozone may not survive ....

That’s what Peter Boone, Simon Johnson, and James Kwak wrote in an Op-ed in the Guardian on October 24, 2008.

During the last three months, the risk that Ireland, Italy, and Greece will default within five years (as implied in credit default swap spreads for their state debts) has quadrupled from approximately 3 percent to 12 percent each. Government debts need to be refinanced periodically, but the current crisis has made that more difficult. Moreover, governments have guaranteed their large financial institutions, for over 3 times the current GDP and over 12 times government revenues in the case of Ireland.

Creditors could become reluctant to hold such risky debt. To win back confidence the country needs to tighten fiscal policy, but this could prove painful without letting the exchange rate to depreciate sharply, thus giving some stimulus to the economy in order to compensate for the deflationary effect of spending cuts and tax increases.

The problem however, the authors write, is that the eurozone nations no longer have control over their monetary policy. The European Central Bank does, but its mandate is to maintain a 2 percent inflation target, while Greece, Ireland, Spain, Italy and Portugal would prefer loose monetary policies.

If there is a sufficiently deep, global recession, they conclude, the eurozone may not survive. If one nation breaks away, investors will wonder who is next, cutting off financing from other countries.