Eventually, you have to pay for your free lunch, but when. Dysfunctional systems can go on a lot longer than people think. Take for example the treatment of slavery in the United States. Our founders could not get around this issue, so they crafted the three-fifths compromise. Then, throughout the 19th century there were more compromises. Essentially, the system was to maintain the status quo. Every time a free state was admitted into the US, a slave state was also admitted. This ensured that the more populous North could not abolish slavery by itself. These compromises gave the politicians job security until 1865.As a nation, we were able to kick the can down the road for almost 80 years.
Europe does not have 80 years, but they certainly have some time. Just like our Congress crafted the Missouri Compromise to keep the status quo going, so does the Eurozone come up wih its own temporary solutions. Currently, most of the money provided by the ECB hasn’t increased lending to consumers and small businesses, but it increased lending to the sovereigns. The Sarkozy trade is alive and well. This scheme can continue as long as there are no consequences, like inflation. Fortunately for Europe, Switzerland is busy supporting the Euro to keep its own currency from stregthening further. The Swiss are able to continue these foolhardy Euro purchases because all of the rich Europeans keep adding deposits to its banking system.
Hence, we are in some sort of equilibrium. Once intervention starts, it continues until the system irretreivably breaks down. When and how this happens is anyone’s guess.
I envision a breakdown scenario like this. An unexpected event will lead to a market panic. The consequences that we discuss but never seems to materialize will all too quickly leading to massive political crises and economic dislocations.
What will be the trigger event? I don’t know, but it won’t be something obvious like a bank or regional default in one of the PIIGs. A coup, a bank failure in another country or even a natural disaster are all possibilities. This event could happen today or in five years, but it will happen.