“Good question!” That was Lyndsay’s response. She lived in Italy for a bit. She would love nothing more than to live there again.

There are two things that impact your vacation costs. The first is the dollar / euro exchange rate. Improvements in the relative dollar strength make things cheaper. The other factor, though, is the local pricing of goods. Purchasing Power Parity isn’t a direct foreign exchange problem. Prices could drop/rise faster or slower than the exchange rate. For the short(er) version, I think your vacation would be cheaper.

Allow me to start by stating that an immediate, actual default by Italy is rather unlikely. Even a failed bond auction wouldn’t result in an immediate default. Failed bond auctions aren’t as uncommon as people would like / sometimes assume. They aren’t always the panic-inducing signal that I suspect they’d be in the next three months.

Sovereign defaults are never a simple matter. There are many different ways a country can default, and the consequences are even more varied. The Latin American currency crisis involved a few defaults. For Argentina, default was an extremely positive move (other aspects of their crisis, like the recognition of obligations for odious debts, were less positive).

There are different ways to default. The US, for example, had years of currency devaluation against the Japanese yen. Japanese investors in US debt recovered less from US bonds (exchange rate adjusted) than US investors in Argentinian debt. Of course, the US didn’t actually default. We didn’t exactly pay our creditors real interest, though.

If the Eurozone starts crumbling, France and Germany will support devaluation of the Euro. That would cause Italy’s default to resemble the US more than Argentina. It’s possible that there would be another round of currency / debt problems in fifteen years (Italy’s demographics are worse than the US for social security type problems). Let’s ignore that for now, as your vacation funding options will have likely changed by then. A massive intervention by the ECB to devalue the Euro would make vacationing in Italy cheaper. The affordability would also be helped by the fact that Italy would likely be in a recession as a consequence of whatever triggering event lead to the currency intervention (the prices could be falling while the exchange rate was becoming more favorable). This would be further enhanced if China’s bubble burst.

What complicates such analysis further is the fact that the US doesn’t exist independent of the triggering event. Global financial markets are still quite intertwined. Whatever triggering event causes the ECB to intervene could also cause the Fed to intervene. “Bugger thy neighbor” is the default strategy discussed in economic forums for such a scenario. If things unfold in the near future, however, the dollar will still be a flight to safety instrument. That will hamper efforts to devalue the dollar, and your Italian vacation will still be cheaper than today. If the dollar stops having this magical halo of confidence (or if you see big CPI in the US), then this analysis is broken. If the Eurozone entered a deflationary death spiral, this analysis is also broken, and the exchange rate with the dollar will be the determining factor.