I spent the long holiday weekend watching fireworks. First, our neighbors set off professional-grade mortars which rained showers of sparks into our backyard and sent burning debris bouncing off our other neighbor’s house. Second, I watched hometown hero Abby Wambach finally get the FIFA Women’s World Cup after an astonishingly high scoring final match against Japan. Third, I’ve been stuck to my phone reading the updates on Greece. The Greece referendum – hastily written, technically irrelevant, challenged in court, and condemned by the EU – failed as Prime Minister Tsipras wanted it to, reassuring him of a political will for an end to austerity and debt repayment.
As a result of the referendum, the debt that Greece owes (to Germany, France, the IMF, and so on) is getting shut down one way or another.
Finance Minister Yanis Varoufakis, who has done an incredible job uniting the European Union against him, resigned this morning as a signal that Greece would prefer to maintain the Euro while still eliminating some of its debt burden. Prime Minister Tsipras has promised a “No” vote for the referendum should lead to a quick renegotiation with their creditors and a more favorable deal, with a greater haircut to debt levels. That might be possible, but how much damage has the new Greek administration already done to their reputation and credibility? Do the creditors want to cave in to threats, insults, and a precedent that could wipe the rules for their monetary union? If so, welcome to a world without rules; the European Union will be a constant battle of capitulation, money transfers from rich nations to poorer ones.
The other alternative, perhaps more likely, is a Greek default on its debts, a return to the drachma and an exit from the Eurozone. In this situation, the entirety of Greek national debt would be wiped off the books- but the Greek government already spends more than it makes – even with help from the EU. Shuttering the economy to bare-bones operations and starting from scratch is going to severely depress Greece for years, and a default means that creditors won’t be inclined to give Greece any loans. If they are kicked from the Eurozone, welcome to a world without finance; the Greeks are going to face a very deep recession much worse than what they’ve already had.