Because as part of the Eurozone your national bank and sovereign state has monetary and fiscal obligations to the ECB and Eurozone creditors.

From a naive perspective, reneging on any of these obligations would put your Eurozone membership at risk.

In practice, the situation is almost the reverse. It is/was far easier to maintain the status quo as long as possible to enable the use (abuse?) of monetary policy transmission mechanisms of the ECB and other EU state bailout facilities than to take unilateral action like elective default.

Elective default would have meant any Eurozone state would almost certainly be required to leave the Eurozone, including rescinding ECB support and incurring the huge upfront cost of reintroducing their own currency.

TL;DR. Comparing Iceland's situation directly to any Eurozone state is an economic fallacy, especially since the Eurozone has no mechanisms at all that support leaving it (e.g. transition to a parallal ECU2-like currency while retaining access to ECB or other Eurozone facilities).

"Because as part of the Eurozone your national bank and sovereign state has monetary and fiscal obligations to the ECB and Eurozone creditors."

But the point was that these were private bank debts, not debts of either the national bank or the state. Once they the state took on those debts, yes, there were obligations.

It's effectively the same under ECB's monetary policy mechanisms. Those bank debts are used as collateral for borrowing from the ECB or the Eurozone inter-national bank payment processing system (called TARGET2) or Eurozone creditors.

Imagine if Iceland could only issue debts, both public and private in US dollars. That, its interest rates were set by the Fed. That, its banks could tap short and medium unlimited liquidity against this collateral. That, its USD payments went first through a US-based payment processing system. But only if you never default on this collateral.

Then, you would have something similar to the situation Ireland faced.

It is true Ireland could have tried to hold out for an externally-led, Greek-style debt restructuring, though I suspect it would have been harder for them due to the private bank debt transfer. But even that still is not elective default to their own currency with full debt control. Therefore, not the same as Iceland.

"[Public & Private bank debt] effectively the same [under TARGET2]"

Interesting assertion, as it would mean there effectively are no private banks and "too big to fail" is enshrined in basic EU mechanisms, and independent of size -> automatic bailouts all the time.

Are you referring to Sinn's analysis? While that's an interesting read (intro: http://en.wikipedia.org/wiki/TARGET2), it doesn't seem to quite support such a staggering claim.

However, I do see that European politicians are acting this way, so that supports what you are saying, but they actually have to act to do so, which contradicts it.

Certainly the rest your text simply assumes the equivalence of public and private debt, rather than showing that this is the case.

"you never defaulted on this collateral" -> There are two different "you" in this case. So what happens if one of these two "you" does default?

You are implying that the default of one "you" automatically means the other "you" never gets money again (the bond vigilantes and all that), but as the fine article showed, the same was said for Iceland and it didn't happen.

I know you claim that there is only one "you", but I just don't see that in your analysis (or in what Sinn wrote).

"It is true Ireland could have tried to hold out for an externally-led, Greek-style debt restructuring" -> again, that only applies after taking on the bank debts.

Considering there is no official way to leave the Eurozone nor to be expelled by other members, your whole premise is false.

The truth is actually the opposite: "rich" Euro countries are de facto forced to carry their weaker partners, one way or the other, to stop their own currency from sinking. The whole austerity-vs-default debate is just a game of chicken that Irish/Greek/Italian/etc elites were not good at playing (or did not want to play, in order to safeguard some specific economic interests).

What makes you think the elites are not good at playing this game? They seem to be doing an admirable job protecting their interests.

the harsh truth of being a eurozone member is that the country's taxpayers are not necessarily intended to be involved in a decision to default on debts. Case in point, there was swift and sound backlash when the former Greek prime minister proposed a referendum on one of the many Greek bailout packages.