In withdrawing from negotiations with Greece's international creditors and holding a referendum on whether Greece should adopt the further austerity required by the lenders' financial aid package, Greek Prime Minister Alexis Tsipras figuratively pulled out a gun and threatened to blow a hole in the life raft that was given to his country in an attempt to get a nicer boat. The referendum may save his left-wing Syriza party but may cause Greece to default on its loans and exit the common Euro currency.
Greece has long been irresponsible financially -- originally having excessive pensions, early retirement ages, an over-regulated and corrupt economy, 20 percent of the workforce in the employ of a bloated government, and uneven tax collection. Although some progress on these categories was required by the international creditors to grant the two financial bailouts Greece has already received, more austerity and reform are needed to clear the still abundant deadwood out of the Greek economy so that it can resume normal economic growth.
Tsipras was elected in the first place by excessively promising an austerity-weary Greek public that he would repudiate the latest bailout deal with creditors and negotiate an end to the required austerity. In the negotiations, the creditors have once again made some concessions, but have tired of Greece's antics. Years of living excessively high on the hog really requires more tough austerity and reform on Greece's part in order to have a chance to again have real prosperity.
Shockingly, some Western economists, including Nobel Laureate Paul Krugman, are instead blaming European governments, such as Germany and France, for not letting Greece up off the mat by writing off some of its debt, so that the Greek economy can grow again and thereby eventually pay off the rest of the debt. Unsurprisingly, these countries, after having bailed out Greece twice, are unenthusiastic about a costly write-down of debt. And the artificial growth propounded by such economists will only make things worse. In the long run, Greece and the international financial system will be better off if Greece is forced to right the ship instead of floating along on pieces of wreckage. In the long-term, businesses and even countries must be held responsible for their actions, even if that means "tough love." Otherwise, they will realize that they can again someday live beyond their means.
Politically, the referendum is smart on Tsipras's part. By pointing a gun at the life raft, he plays on fears that if Greece goes down so will other fragile European economies -- such as Spain, Portugal and Italy -- to improve his negotiating position. A "yes" vote by the Greek people to accept more austerity relieves him of his excessive campaign promises to fight the continuation of such unpleasant belt-tightening. Tsipras advocates a "just say no" vote, believing it will show that the Greeks mean business by cocking the gun for future debt relief negotiations.
Yet things have changed after five years of bailing out Greece. As a whole, the European economy is better than it was in 2011 or 2012 and is less susceptible to financial contagion from Greece going down. Also, the other most fragile economies in the Eurozone are healthier now, with Spain and Portugal returning to growth and Italy beginning to do so. Furthermore, there are now far fewer private holders of Greek debt, there is now a new emergency bailout fund for emergencies, and the European Central Bank has pledged to "do whatever it takes to save the Euro." Although the latter policies of reserve funds and money printing are unwise, it has eroded Greece's negotiating position vis-à-vis Europe. Finally, further eroding Greece's position is that in the end, the Greek economy is only 1.5 percent of that of the Eurozone.
Politically, fears have been raised that if Greece defaults and exits the Euro currency, it still would be a member of the European Union and could thus veto continued European economic sanctions against Russia over its interventions in Crimea and eastern Ukraine. The unstated implication is that the end of European sanctions could somehow make Russia more aggressive and lead to a future war. Whoopty doo. The sanctions, although hurting Russia economically, have had little effect on its behavior in either place.
The long and the short of it is that Greece's international creditors should end the bailouts and let the ungrateful and arrogant Greece default and exit the Euro currency. The major long-term ill-effect that this short-term disruption would generate would be on European pride in a common currency that should have never been concocted in the first place. For the long term, cutting the Greek life boat away and leaving it drifting on its own, will teach the Greeks -- and other irresponsible countries, such as Spain, Portugal, and Italy -- that when you behave irresponsibly over many years, some pain is needed for the gain of renewed economic vigor. As for the United States, with an artificial economic recovery driven by printing bucketloads of money and a $18 trillion public debt caused by excessive spending on defense and domestic social programs over a long period, the proper response to the Greek and Eurozone mess is humble silence and non-intervention and a focus on getting its own fiscal house in order by its own austerity program to pay down that growth-stifling debt.