It's the proverbial 110 lb weakling versus the heavyweight champion of the world. And what looks like a horrible mismatch is actually a pretty even battle. This is true because the little guy may go down, but if he does, he's going to take the big guy with him.
Up until now, the EU's attitude to Greece was a bit like Tim Geithner's attitude to the debt ceiling: Greece will implement the reforms it has promised, it will recover economically, we will give them the liquidity they need from the EFSF, there is no alternative. But now, starkly, two alternatives have emerged blinking into the harsh light of the market. Either Greece defaults and remains in the euro; or it defaults and leaves the euro. This is not an orderly London Club bail-in default with a modest 21% haircut and an exit yield of 9%: rather, it's a proper we-can't-pay-our-debts default with significant losses for all banks holding Greek debt - including the ECB.
Meanwhile, with the exit of Jürgen Stark, the ECB itself has clearly reached the limit with respect to how much it can help the eurozone stay intact. Stark's replacement - almost certainly another German Bundesbank type - may or may not be as hardline as Stark was. But Friday's news underlines that the ECB is emphatically not going to behave during this crisis as the Fed did during the last one - by subordinating itself to broader necessities, and making its first priority that it do everything in its power to ensure that a coherent and coordinated crisis-response plan is adhered to. To put it another way: Bernanke, ultimately, did what Paulson wanted him to do. It's not at all clear that Mario Draghi will be able to behave the same way.
So the latest swoon in European and global markets makes sense: we're at an inflection point, in Europe, and all the signs are pointing to more chaos and uncertainty. The last crisis brought Europe and the world together, at least briefly. This one is tearing Europe apart. The unity that we saw at the G20 summit in London in 2009 is nowhere to be seen, and there's no indication that it's going to emerge again, at least not before it's too late. Most of the time, market reports of "worries over Europe" are code for "global stock markets fell, and we don't know why." This time, I think they're legit.
The referee in this match - the European Central Bank - has some skin in this game as well and stands to lose big if Greece defaults and opts out of the euro.
Merkel and the Bundesbank have reached the limit if their ability to bail out the eurozone's southern flank - with trouble brewing for Italy and France as well. The Chancellor's political party, the Christian Democratic Union, has lost 6 straight local elections on the basis of the German taxpayer showing an unwillingness to throw good money after bad.
As Salmon says, this is "an inflection point." Can the euro survive? If I were you, I'd buy gold.