There is a myth going around that Greece went bust because of the size of its welfare state. And the extension of this myth is that sound finances are incompatible with a sizable welfare state. That it is the welfare state itself that is making other countries such as Spain and Italy approach bankruptcy. But this is not true, many European countries have a bigger welfare state in relation to GDP. Greece did not go bust because of the size of its welfare state in relation to GDP but because of the size of its debt in relation to GDP. Countries can choose to be more or less socialist. What they cannot choose is to be socialist when they can’t afford it. Nordic countries are more socialist than Greece, but they provision for their generosity.
I believe that the Greek economy is a tumor in the EU economy. I don’t believe all of the EU is as sick and I don’t think we should bail Greece out. Instead for their own good and ours we should let Greeks go back to their old currency, devalue and default. Then we should focus on saving the banks (but not the shareholders of the banks) who lent money to Greece or bought their bonds.
Now what confuses people is that they think that sovereign default means a country not paying its debts at all. That is not really how it generally works. What we saw with Argentina for example is that a substantial part of the debt was paid. And this will be the case of Greece. They will probably end up paying 60% of their debt. That’s what they need to move on. Not a debt forgiveness but a significant debt reduction to say the levels of Portugal, Italy and Spain or around 1 time GDP (Spain is less but it’s getting there). Now interestingly I tried to find out how much Greek sovereign debt was trading for and it is trading for around half of its value. So the markets also believe Greece will default but pay half of its debt.