The old joke says that if you owe the bank $1 million you have a problem, but if you owe the bank $1 billion, the bank has a problem.  That is the situation in Europe in a nutshell. The highly indebted weak economies of southern Europe somehow talked the banks into loaning them much too much money. Now they are not very enthusiastic about paying it back. They have gone for help to their rich German uncle who agreed to help if they would stick to a budget, but that turned out not to be very much fun. So now they don’t want to pay and they don’t want to live within their allowance.

If this problem was not playing out in Europe the solution would be obvious. Countries that cannot or will not pay their debts default on them. The creditors take their losses and move on. The currency of the defaulting country goes in the tank, and the buying power of its citizens is cut drastically.  Discussions about austerity become irrelevant. The drop in value of the currency automatically trims everyone’s standard of living, and life goes on. Nor is this a rare event. Over the last two hundred years, twenty-two European countries have defaulted on their debt. Spain holds the record, having defaulted nine times since 1809, an average of once every twenty years or so.

In 2002, Argentina was faced with a large foreign debt, a budgetary deficit, and pressure from creditors, including the International Monetary Fund, to adopt a harsh austerity regime. The government of the day attempted to comply but was faced with growing civil unrest, rioting in the streets and increasingly violent protests.The government fell and the President was forced to flee his residence by helicopter.  Soon after, Argentina defaulted on about $100 billion of debt. The country lost access to foreign credit markets.  Its currency dropped in value by75% and the country suffered a devastating recession.  Eventually foreign creditors rolled over their debt at 25 cents on the dollar, accepting a loss of 75% of their loans. Argentina regained access to foreign credit markets, and with the new devalued currency, became a highly competitive supplier of both manufactured goods and agricultural products, but a country with much poorer citizens, who suffer to this day.

If Greece were not in the Euro zone there is little doubt that a similar scenario would have played out there by now. The events we now see taking place there are an eerie echo of what took place in Argentina ten years ago, culminating in the collapse of the Greek coalition government in the first week of this month. If Greek voters are unwilling to have austerity thrust upon them by their elected leaders, they will achieve it through other means, and this could include leaving the Euro zone and re-introducing the Drachma, which disappeared in 2001. Those voters who believe that the days of low taxes (or at least low tax compliance) cushy pensions and a high value currency will return with a new government will be sadly mistaken.  Adoption of the Euro appeared to guarantee a free lunch, but now the bills have come in, and can’t be paid. Greece has defaulted on its foreign debt six times in the last two hundred years. The seventh time appears to be getting closer daily.