It is easy to see why the euro is falling. The drumbeat of apocalyptic headlines has only increased in recent weeks, but a fact that is often forgotten is that both creditor and debtor countries have substantial incentives to engage in brinkmanship.
For the growth-oriented (not entirely coincidentally the most indebted) countries, threatening creditors with the prospect of a euro exit is a means to an end. Leaders believe that they can force Merkel and her allies to the bargaining table and achieve a compromise. They hope to spend money today in an effort to kick-start growth while putting off reforms until economic stability returns.
On the other side of the divide, creditors believe that they can wait this out, hoping that Greek leaders will come to their senses before wreaking havoc on the euro zone-and their own economy. They have a number of incentives to downplay the consequences of an exit, as evidenced in the Bundesbank's recent assessment that such an outcome would be manageable.
Creditors also know that an exit would be a Pyrrhic victory for the Greeks themselves. A return to the drachma would cause a crash in the value of savings and incomes, while simultaneously causing prices and the value of government debt to skyrocket.
Regardless of the fundamental arguments for and against an exit, this high-stakes game of chicken is likely to continue in the weeks and months to come. Leaders will continue attempting to score political points at the expense of stability in the financial markets.
For market participants, it is important to remember that the rhetoric and the reality are different phenomena. Focusing too tightly on Greece can blind observers to the emerging problems in Spain, and to the compromises being worked out between Merkel, Hollande, the IMF, and the ECB.
Myopia can be very dangerous.