Does Greece Have More Leverage Than Anyone Thinks?

Atrios writes:

Is still a mystery to me why Greece doesn’t just default on all of its debts, or threaten to anyway. They’ve always had more bargaining power than they have chosen to use.

I wish Duncan would spend more than a sentence or two on this recurrent theme of his. I’m curious what his thinking is. After all, it’s no mystery why Greece doesn’t “just default.” They don’t default because if they did they’d lose all the aid money that Germany is sending their way. And since Greece is already cut off from the bond markets, that means they’d be forced to balance their budget immediately, which in turn would mean far sharper cuts than anything they’ve experienced so far. It would make today’s austerity look like a picnic. The entire country would all but implode.

So what’s their bargaining power? Presumably, the fact that, in the end, Germany would be unwilling to let Greece implode. If Greek politicians just flat out refused to make the cuts Angela Merkel wants, she’d eventually back down because a full default followed by the exit of Greece from the eurozone would be unthinkable.

Maybe. But I’d sure like to see someone make a case for that. A Greek exit would be a big hit to the European project; it would have economic repercussions beyond Greece’s border; and it would reawaken fears that if Greece can leave, maybe other, more important countries can too. But there’s a flip side to this: the economic impact outside Greece wouldn’t be all that big, and the devastation that Greece would suffer would be a mighty powerful signal to Italy and Spain and Portugal that they’d best not tempt fate themselves.

Hell, at this point Germany might actually prefer for Greece to exit the euro and implode. And even if German leaders weren’t quite willing to let Greece go, they’re still hemmed in by public opinion — and public opinion in Germany is pretty unfriendly toward Greece these days.

Anyone want to make the contrary argument in any detail? Just how much bargaining power does Greece really have right now?