The Political Problem That is Greece
Can Europe just keep muddling along for years without ever really addressing Greece's problems? Matt Yglesias suggests the odds are better than you think:
[The] sage words I keep reading in the American press about how Europe’s leaders can’t just keep kicking the can down the road and need to deal with Greece’s basic insolvency strike me as unwarranted. In general, the capacity of large wealthy societies to allow festering problems to go un-addressed seems perennially underrated. I’ll be thirty next week and for as long as I can remember people have been talking about how the United States needs to address entitlement spending and trade imbalances. And as best I can tell, we do need to address those things. Presumably at some point something will happen. But in practice we’ve managed a great deal of can-kicking, seem to have more can-kicking in us, and actually the public and the political elite alike are quite averse to the kind of steps that would address these issues.
I think this is true in general terms, and probably underappreciated. But in the case of Greece I think there's a bigger problem than just the possibility of contagion that forces the EU to act because some bigger country like Spain ends up in trouble.
Roughly speaking, U.S. entitlement spending and trade imbalances are purely economic problems. They can't last forever, but yes, they can last longer than most people think. Greece, though, is different: not only are its economic woes far, far bigger than ours, but it's a political problem too, and it's a political problem on two sides. On the European side, keeping Greece alive requires periodic bailouts, and the German/French/etc. public is getting increasingly edgy about putting up with this forever. Economically it may not be a huge burden, but eventually public animosity toward those Southern wastrels will overwhelm policymaking and the bailouts will have to stop. In Greece, however, the political problem is the mirror image. The austerity required by the end of bailouts is so mind-numbingly severe that the public simply won't stand for it. Eventually, if EU demands become too heavy, the public will demand that Greece default and exit the euro.
Now, it's true that there are two "eventuallys" in that paragraph. And maybe eventually will take a longer time than I think. Still, you're dealing here not primarily with an economic problem, but with a political problem in which public hostility on both sides is rising steadily. That's the kind of thing that's hard to mask with smoke and mirrors forever. If the economy stays sluggish for a lengthy period — and all signs suggest that it will — public acrimony is going to combine with economic nationalism to force something to happen sooner rather than later. If I were an EU/Greek policymaker, I'd assume that I had a pretty limited time to take serious action before the public revolts.