The Telegraph: Germany drawing up plans for Greece to leave the euro

[DCBob]

Plans for Greece to default, potentially leaving the euro, have been drafted in Germany as the European Union begins to face up to the fact that Greek debt is spiralling out of control - with or without a second bailout.

The German finance ministry is actively pushing for Greece to declare itself bankrupt and to agree a "haircut" on the bulk of its debts held by banks, a move that would be classed as a default by financial markets.
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But the severe austerity measures being demanded have caused such fury in Greece, and the cuts required are so deep, that Wolfgang Schäuble, the German finance minister, does not believe that any government would be able to implement them.
-snip-

"He just thinks the Greeks cannot do what needs to be done. And even if by some miracle they did what has been promised, he - and a growing group - are convinced it will not pull Greece out the hole," said a eurozone official.

more: http://www.telegraph.co.uk/finance/financialcrisis/9091021/Germany-drawing-up-plans-for-Greece-to-leave-the-euro.html

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This is starting to sound like a more workable solution to this mess. The Greeks are just too far in a hole and the austerity stuff just makes it worse. A return to the drachma would allow Greece to more competitive on the world market and perhaps allow their economy to slowly recover. It was a mistake from the beginning for Greece to join the euro.

[On the Road]

1. In the Long Run, It's Probably Good News for Everyone

provided that a default is not going to take the rest of the world down, too.

For the intermediate term, though, Greece may suffer more by going back to the drachma. It is true that it would help the trade balance, but AFAIK Greece is not a big exporter outside of tourism. OOH, imports like oil are very difficult to cut and those would skyrocket once the currency is devalued. As would debt payments. These German austerity measures are probably much less onerous than the alternative.

Deficit spending may be the best way out of a depression, but at this point, who is going to lend Greece money to keep stimulating their economy, and what interest rates will they charge? The austerity measures may not be the right long-term solution, but Greece needs to have some prospect of eliminating a large structural deficit.

[DCBob]

2. The debt will still need to dealt with which is what they are trying to do now.

I think this article refers to the possible next steps once they have a final deal which sounds like will come very soon. For sure going back to the drachma will have some negative repercussions but on balance I think they will come out ahead eventually. But for sure keeping things afloat until that happens will be the challenge.