In a result that should surprise no one, the Greeks recently in a referendum, voted to reject European Union’s demand for additional austerity measures as the price for providing funds to allow Greek banks to operate.
There are three reasons this should have been no surprise. First, the ruling Coalition of the Radical Left, or Syriza party, is ruling because it has an understanding of the Greek mood. Second, the constant scorn and contempt that the European leadership heaped on the Prime Minister and Finance Minister convinced the Greeks not only that the scorn was meant for them as well, but also that anyone so despised by the European leadership wasn’t all bad.
And most importantly, the European leadership put the Greek voters in a position in which they had nothing to lose. The Greeks were left to choose between two forms of devastation—one that was immediate but possible to recover from, and one that was a longer-term strangulation with no exit.
European leaders miscalculated. They thought Greece could be more flexible, and they wanted to demonstrate to any other country or party that might consider a similar manoeuvre in the future what the cost would be. In the quest to avoid the moral risk of compromising with the Greeks, EU nations created a more dangerous situation for themselves.
As the International Monetary Fund, IMF noted (while maintaining a very hard line on Greece), the Greeks cannot repay their loans or escape from their economic nightmare without a substantial restructuring of the Greek debt, including significant debt forgiveness and a willingness to create a multi-decade solution.
Obviously, the Greeks knew this as well. What was obvious is that austerity without radical restructuring would inevitably lead to default, if not now, then somewhere not too far down the line. All of the austerity measures demanded would not have provided enough money to repay debts without restructuring. In due course, Greece would default, or the debt would be restructured.
European leaders knew perfectly well that the austerity measures were both irrelevant and damaging to debt repayment. They insisted on this battle at this time because they thought they would win it, and it was important for them to get Greece to capitulate for broader reasons.
No other EU country is in a condition as bad as Greece’s. However, a number of EU countries, particularly in Southern Europe, carry a debt burden they would like to renegotiate. They are doing better than Greece this year, but with persistent high unemployment—for example, 22.5 percent in Spain as of May—two things are not clear: first, what shape these countries will be in next year or the year after that, and second, what governments would come into office, and what the new governments’ positions would be.
Greece accounts for less than two percent of the European Union’s Gross Domestic Product, GDP. Italy and Spain are far more important. The problem of restructuring debt is, once it is done for one country, others will want to restructure as well. The European Union did not want to set any precedent for future crises or anti-EU governments. If Greece withdraws from the European Union, its impact on the euro will be trivial.
Greece has three alternative sources of money outside EU funding. The first is Russia. In Central Europe, the view is that Russia and Greece have had an understanding for several months about a bailout, which could be why the Greeks have acted with such bravado. Another, though less likely, source of funds for Greece is China and some of its partners. Finally, there are American hedge funds and private equity firms.
Having shed its debt to Europe and weathered the genuinely difficult months after default, Greece might be an interesting investment opportunity. We know from what happened earlier in Argentina that when a country defaults, a wall is not created around it. Greece has value and, outside the debt, it remains a high-risk but attractive investment; but the future still remains cloudy.

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