Assuming that Germany eventually agrees to backstop the debt of southern European countries, the eurozone as a whole will be better off if that bailout is unconditional, rather than accompanied by the labor market reforms and future budget controls that Germany is demanding of countries in return.
If Germany fails to bail out the southern tier of Europe, its own economy will be hurt more — because of output and asset losses — than it would be by an unconditional bailout.
The main reason other eurozone countries need to worry about Greek banks losing access to ECB support is because the ensuing chaos in Greece could trigger bank runs in peripheral countries.
