It is unclear if the Greeks will opt not to default. The certain price of default -- being forced to use their national currency instead of the euro -- actually would increase national sovereignty. There will be economic pain if the Greeks continue with the euro, and there will be economic pain if the Greeks leave the euro; the political consequences of losing sovereignty in the face of such pain could easily be overwhelming. Default, while painful to Greece, might well be less painful than the alternative.
The German Dilemma
The Germans are caught in a dilemma. On the one hand, Germany is the last country in Europe that could afford general austerity in troubled states and the resulting decline in demand. On the other hand, it cannot simply tolerate Greek-style indifference to fiscal prudence. Germany must have a structured solution that to some degree maintains demand in countries such as Spain or Italy; Germans must show there are consequences to not complying with the orderly handling of debt without default. Above all, the Germans must preserve the European Union so they can enjoy a European free-trade zone. There is thus an inherent tension between preserving the system and imposing discipline.
Germany has decided to make an example of the Greeks. The German public largely has bought into Berlin's narrative of Greek duplicity and German innocence. German Chancellor Angela Merkel has needed to frame the discussion this way, and she has succeeded. The degree to which the German public is aware of the complexities or the consequences of a generalized austerity for Germany is less clear. Merkel must now satisfy a German public that questions bailouts and sees Greece as simply irresponsible. Capitulation from Greece is necessary for her as a matter of domestic politics.
The German move into questions of sovereignty has raised the stakes in the debt crisis dramatically. Even if the Germans simply back off this demand, the Greek public has been reminded that Greek democracy is effectively at stake. While Greece may have borrowed irresponsibly, if the price of that behavior is yielding sovereignty to an unelected commissioner, that price not only would challenge Greek principles, it would bring Europe to a new crisis.
That crisis would be political, as the ongoing crisis always has been. In the new crisis, sovereign debt issues turn into threats to national independence and sovereignty. If you owe too much money and your creditors distrust you, you lose the right to national-self determination on the most important matters. Given that Germany was the historic nightmare for most of Europe, and it is Germany that is pushing this doctrine, the outcome could well be explosive. It could also be the opposite of what Germany needs.
Germany must have a free-trade zone in Europe. Germany also needs robust demand in Europe. Germany also wants prudence in borrowing practices. And Germany must not see a return to the anti-German feeling of previous epochs. Those are several needs, and some of them are mutually exclusive. In one way, the issue is Greece. But more and more, it is the Germans that are the question mark. How far are they willing to go, and do they fully understand their national interests? Increasingly, this crisis is ceasing to be a Greek or Italian crisis. It is a crisis of the role Germany will play in Europe in the future. The Germans hold many cards, and that's their problem: With so many options, they must make hard decisions -- and that does not come easily for postwar Germany.