On the Greek side, the Syriza party's leaders are making the decisions. Those leaders have only limited room to maneuver. They came to power because the mainstream eurocratic parties had lost their legitimacy. Since 2008, Greek governments appeared to be more concerned with remaining in the eurozone than with the spiraling unemployment rate or a deep salary cut for government workers. That stance can work for a while, if it works. From the Greek public's point of view, it didn't; many Greeks say they did not borrow the money and they had no control over how it was spent. They are paying the price for the decisions of others, although in fairness, the Greeks did elect these parties. The Greeks do not want to leave the euro, interestingly. They want to maintain the status quo without paying the price. But in the end, they can't pay the price, so the discussion is moot.
The Greek government is thus calculating two things. First, would covering the next payment be better or worse than defaulting? Second, will behaving like the eurocratic parties they forced to the wall leave Syriza internally divided and ripe for defeat by a new party? The German calculation has to be whether a default by the Greeks, one that doesn't cause the sky to fall, would trigger recalculations in other debtor countries, causing a domino effect.
The Future of Free Trade
The more fundamental issue concerns neither the euro nor the consequences of a Greek default. The core issue is the future of the European free trade zone. The main assumption behind European integration was that a free trade zone would benefit all economies. If that assumption is not true, or at least not always true, then the entire foundation of the European Union is cast into doubt, with the drachma-versus-euro issue as a short footnote.
The idea that free trade is beneficial to all sides derives from a theory of the classical economist David Ricardo, whose essay on comparative advantage was published in 1817. Comparative advantage asserts that free trade allows each nation to pursue the production and export of those products in which the nation has some advantage, expressed in profits, and that even if a nation has a wide range of advantages, focusing on the greatest advantages will benefit the country the most. Because countries benefit from their greatest advantages, they focus on those, leaving lesser advantages to other countries for which these are the greatest comparative advantage.
I understate it when I say this is a superficial explanation of the theory of comparative advantage. I do not overstate it when I say that this theory drove the rise of free trade in general, and specifically drove it in the European Union. It is the ideology and the broad outlines of the concept that interest me here, not the important details, as I am trying to get a high-level sense of Europe's state.
To begin with, the law of comparative advantages does not mean that each country does equally well. It simply means that given the limits of geography and education, each nation will do as well as it can. And it is at this point that Ricardo's theory both drives much of contemporary trade policy and poses the core problem for the European Union. The theory is not, in my opinion, wrong. It is, however, incomplete in looking at the nation (or corporation) as an integrated being and not entities made up of distinct and diverse interests. There are in my mind three problems that emerge from the underlying truth of this theory.
The first is time. Some advantages manifest themselves quickly. Some take a very long time. Depending on the value of the advantage each nation has, some nations will become extremely wealthy from free trade, and do so quickly, while others will do less well, and take a long time. From an economic point of view this may still represent the optimal strategies that can be followed, but from a more comprehensive standpoint this distinction creates the other two problems with the law of comparative advantage.
The first of these is the problem of geopolitical consequences. Economic power is not the only type of power there is. Disparate rates of economic growth make the faster growing economy more powerful in its relation to the slower growing economy. That power is both political and military and can be used, along with economic advantage, to force nations into not only subordinate positions but also positions where their lesser comparative advantage diminishes even further. This does not have to be intentional. Maximizing comparative advantage makes some powers stronger than others, and over time that strength can leave the lesser power crippled in ways that have little to do with economics.
The last problem is the internal distribution of wealth. Nations are not independent beings. They are composed of autonomous human beings pursuing their interests. Depending on internal economic and political norms, there is no guarantee that there will not be extreme distinctions in how the wealth is distributed, with a few very rich people and many very poor people. The law of comparative advantage is not concerned with this phenomenon and therefore is not connected to the consequences of inequality.
