There is too much gnashing of teeth over southern Europe’s demise. The economic effects will be slight. Yesterday’s late-in-the-day rebound shows that investors are starting to get the right idea (and Asia was up overnight as well).

What’s the worst that can happen? Italy’s banks will belong to someone else (perhaps China), the French banks will be nationalized yet again, and Germany will carry on exporting to Russia and China. The eurozone will be reduced to a prosperous rump, the lira and drachma and perhaps the peseta will return at deeply reduced valuations, southern European pensioners will be miserable, but few others will care.

Investors should continue to avoid Italian and Spanish debt, as well as European banks. Personally I have no direct exposure to European equities at all and see few reasons to be involved in the sector until the dust settles.

Italian (as well as Greek and likely Spanish politics) has taken the form of a Nash (should I say Gnash?) equilibrium, in which the individual pursuit of self-interest by political constituencies ensures that all of them will go down together. Devaluation is a coward’s response to economic problems; it is the equivalent of a one-off wealth tax that makes everyone poorer, while distorting economic contracts across the board and reducing economic efficiency. There is a reason why seemingly rational self-interest may lead to mutual annihilation of the negotiating parties in southern Europe. That reason is demographic. The prospective pensioners of infertile southern Europe know they are doomed with the elderly dependent ratio like to rise to 60% by mid-century. They might as well make their stand now.

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Claro, claro.