When Greece Defaults

By HOLMAN W. JENKINS, JR., WSJ

Greece says it's not leaving the euro, and everyone else says Greece must default on its euro debt. What does such a scenario portend?

Athens, no longer able to borrow euros and hardly able to extract enough euros from its own population, won't be able to pay its bills. Many of the hundreds of thousands in the Greek government's employ stop coming to work because they stop receiving paychecks. Many private businesses that depend on their patronage also cease to function and cease to pay their employees. Savings vanish in a rash of bank failures.

What happens next? Greeks do what anybody would do when they can't grub up an income. They find things to sell: cars, houses, businesses, islands, beaches, historic sites and ouzo distilleries to tide themselves over.

Eventually the euro prices of a Greek vacation or a Greek factory or Greek-made goods become attractive and euros rush in from abroad. Jobs start to rematerialize. The economy, after taking a sound thrashing, begins to grow again.

All this is impeded, unfortunately, by riots and political instability and mass privation. Quite possibly, things keep getting worse for a long, long time, before they start getting better.

To the rest of Europe, this would merely be a matter of sorrow, regret and charity to keep the Greeks afloat—if it weren't for the fact that if Greece is allowed to default, investors might naturally wonder which other countries might default.

Private money, if it hasn't already, might then stop being available to roll over the debts of other heavily indebted European governments. These states would become even more dependent on loans from stronger neighbors, and finally only from the Germans, who are presumed always to have access to the private markets for loans.

Except for one thing: Who says the Germans would always have access to private loans? This is the hole in the theory that Berlin's taxpayers only need to step up. You can overtell the story of Germany's strength among the wreck of its neighbors. Germany's government today is heavily-indebted; its vaunted reforms in the mid-2000s were impressive relative only to those of, say, France. Its recent prosperity depended precisely on selling BMWs and Mercedes to its overspending neighbors.

In a world in which there is nobody left to borrow from, not even Germany, life affords one other option: The central bank prints money. What will stop contagion is the European Central Bank (ECB) drawing a line somewhere—at some group of countries that would trigger the bank's willingness to print unlimited euros.

But this has also been the political stumbling block all along. Those wailing for a European TARP, either to bail out its banks or bail out its governments, fail to notice that doing so would necessarily force a decision about which governments will be inside the magic circle of the saved and which won't. Yet that's exactly what's necessary to forestall a complete meltdown. Let the world know which countries the ECB (which is still pretending to be a virtuous, nonmoney-printing central bank) will keep afloat at any price.

Then why not save every government, even Greece's, from default? Because there would be no possibility of discipline in the eurozone in the future unless bond markets have seen that default is a real possibility.

One way or another, Europe was likely to end up on massive injections of monetary glucose. This won't necessarily lead to massive inflation; it depends on how quickly the member countries respond with "real" reforms that change "real" things in their economies. And expect the ECB, which has become practiced at gilding its interventions with talk of sterilization, to become even more practiced at it.

Behind the euro was an ahistorical dream of a European superstate, in a world that—if you haven't noticed—has been moving steadily in the opposite direction. European elites may crave unification, but most societies seem to crave democratic independence. The United Nations boasts 193 member states today, up from 127 in 1970.

The European superstate is dead, but the common currency isn't necessarily dead. The euro is finally achieving at least one of its goals—forcing economic reform, though probably not the salutary, clean reform that many hoped for. More likely sub-par reform, with bouts of inflation, stagnation and pitched battles over political allocation of scarce opportunity and resources.

Sadly, a similar destiny probably lies ahead for the U.S. Only after a series of panics, possibly quite destructive ones, will politicians have leeway seriously to address the unsustainability of the current welfare state. Every move will be too little to ward off another crisis, another showdown, and potentially decades of political strife and economic uncertainty.