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The drive for ever more "austerity" in Greece is having the opposite results. It is pushing the Greek economy further into recession, reducing tax revenues, worsening the country's fiscal deficit and debt load, and thus only necessitating further belt-tightening. It is a vicious cycle with no way out. Even the IMF has acknowledged that and it is now becoming clear that the only choice is bankruptcy or a Euro exit. An option that was politically inconceivable 6 months ago is currently on the table. (See Greek Euro Exit Weighed By German Lawmakers on Bloomberg.)
From the beginning it has been somewhat ill-defined notions of contagion, exacerbated by forced "voluntary" debt forgiveness that has lead the crisis to spread into Spain and Italy. So much so that even the troubles in non-Eurozone Hungary lead panicked investors to dump EU government bonds and the currency (see previous WhatIf post).
With Greece out, the situation would appear manageable and in retrospect Fitch's warning of "cataclysmic' collapse of the common currency would likely mark the low for the Euro against other G-7 currencies. At the time the panic was running so high that investors were willing to pay to lend their money to safe-haven Germany (see prior WhatIf post on negative German yields). Time is running out for Greece and it will likely reintroduce the drachma, putting an end to this chapter of the Euro crisis and giving a major boost to the Euro.
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