Bailout Or Default

It’s very difficult to understand what’s supposed to be happening with Greece:

On Sunday, finance ministers from the euro zone will meet in Luxembourg and are expected to approve the next dispersal of aid. But if Mr. Papandreou fails to push through the new austerity measures that Parliament is expected to begin debating next week — with a confidence vote scheduled for Tuesday following a cabinet reshuffle last week — it could jeopardize the second rescue package that Greece needs in order to carry it through next year. A default would send the euro zone and world markets into a tailspin.

To a first approximation, Greece’s problem is that it can’t pay the money it owes. When you owe more money than you pay, the normal solution is to not pay the money you owe. If the problem with Greece defaulting is that it would “send the euro zone and world markets into a tailspin” then it seems like the euro zone (or “world markets”) have a strong interest in bailing Greece out so as to avoid the default scenario. The idea of austerity seems nearly irrelevant to this calculation. Money was loaned to Greece at German-style interest rates. That can’t have been based on the assumption that the Greek economy was the same as the German economy or that Greek governance is the same as German governance. It must have been based on the assumption that in the event of a crisis the European Union would move to fiscal integration, since the system is unworkable without it. Now we either need to move to fiscal integration (bailouts, guarantees, etc.) or to unwind the system (defaults, runs, and countries forced to reintroduce devalued national currencies).