I basically concur with the Ambassador's view and here are a few pertinent points. I am using a Q&A format to make sure I get all the bases covered.
Q: Does expansionary monetary policy help generate growth?
A: This is a trillion dollar question that will elicit 12 different answers from 10 economists. My take is that it does if central banks can fool companies and individuals to believe that the growth as a result of an increase of money supply is real and sustainable which leads to more consumer spending and investment and generates real growth. No one will be fooled in Europe given the current state of affairs.
Q: What about expansionary fiscal policy?
A: This is even more controversial than the previous question and I am not attempting to provide an answer. However, this is 2012 not 2008 and any politician that supports expansionary fiscal policy is attempting political suicide.
Q: What's the chance of any country leaving the Euro in the next twelve months?
A: Very low, less than 10% in my opinion. Political will is one thing. Lack of an exit mechanism and coordination between the ECB and the various EU countries is another. Moreover, no matter Greece stays or leaves the Euro Germany and major European banks are still on the hook, so they may as well keep Greece in the Euro and focus on preventing Greece's problems from spreading to the rest of the continent.
Q: What's the chance of a full blown catastrophe?
A: Low, less than 20% in my opinion. As long as the problem lies within Europe, learning from the 2008 financial crisis, the EU/ECB/IMF triumvirate will not hesitate to use the nuclear option, which is to create an unlimited amount of Euros and issue Eurobonds to stabilize a failing country's debt. Germany will not be in the way because its leader doesn't want to be blamed as the one that dooms Europe, something that even Hitler failed to do. A full blown catastrophe will happen only if something catastrophic happens elsewhere that spreads to Europe, such as a Middle East conflict, a US or China financial crisis.or who knows what can go wrong in Russia.
Q: What's the most likely scenario?
A: Permanent stagflation as suggested by the Ambassador. Tighter fiscal and political union between the EU countries with more power centralized in Brussels. More social turmoil, riots and extremism given tension between Brussels and EU countries and emergence of fringe political parties and movements. Major wars unlikely as EU countries are too complacent and demilitarized to fight among themselves and the US can protect them from non-EU enemies.