The Greek sovereign debt crisis has entered a critical phase. The four protagonists--the Greek government, its creditors, the International Monetary Fund, and the leaders of the eurozone--all feel they have been pushed as far as they can go; further concessions may be beyond them. Even though the Greek government narrowly averted disaster by surviving a no-confidence vote last night, the country's prospects look grim. If it tips from managed austerity to chaotic default, the shock will convulse the eurozone.
Consider first the position of the Greek government. It is being asked to free up money for debt repayment by inflicting austerity on its people. Having already slashed pension promises and presided over an increase in unemployment since 2009 from 9 percent to almost 16 percent, it is now supposed to cut the public sector payroll by a fifth and privatize state industries at the unlikely rate of nearly one per week. And even if it does these things, Greece will still be staggering under impossible quantities of debt. Not surprisingly, citizens have taken to the streets and the government's grip on power is slipping.
Next, consider Greece's creditors. They are not programmed to forgive debt in the name of eurozone stability; they have a duty to their shareholders to claw back their money. So when Europe's leaders say that banks should "voluntarily" roll over Greek debts rather than demanding repayment, they are invoking a fairy godmother that does not exist.
If Greece can't repay its debts, and if creditors won't forgive them without being forced to do so, the final option is a bailout. This will have to be more generous than the package Greece received last year, since clearly that has failed--Greece's ability to borrow in the markets at reasonable rates has actually diminished. But the bailout providers are showing some fatigue. This week the IMF balked at providing fresh money to Greece in the absence of a plausible plan for Greek recovery.
That leaves the fourth protagonist, the eurozone's leaders. They are going to have to dig deep into their pockets to come up with the scale of bailout that Greece needs, and it is not at all clear that voters will tolerate this. Germans don't see why they should transfer tax money to Greeks who retire earlier than they do, and who notoriously don't pay their own taxes. The Dutch and Finns are equally restive.
And well they might be, since even a very large bailout might not be the last one. Greece runs a large current-account deficit. So long as this deficit persists, the country must borrow from foreigners to finance it--racking up new debt in the process. But to stop running a current-account deficit, Greece must become more competitive. Since exchange-rate adjustment is impossible for a country with the euro, the depreciation has to come in the form of falling wages and prices. That is not only politically implausible. It would also boost the real value of Greece's debt and compound the core problem.
There are no easy ways out. For more than a year, Europe's leaders have pretended otherwise, kicking the can down the road with stopgap measures. But voters in both Greece and the core countries are running out of patience. The euro, intended to unify Europe, is driving it apart. A crunch may be approaching.