Smoke and Mirrors: Greece's Day of Reckoning

Photograph by Angelos Tzortzinis
Raging against the storm A man in Athens reacts after an attack by riot police in Syntagma Square, the site of mass protests in response to budget cuts

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Allowing European waffling on those and other terms of Greece's next bailout to drag on would make that scenario more likely if it holds up the next aid tranche needed to cover sovereign-debt payments due in mid-July. A continued rise in oil prices might also set things off, making it harder for countries like Italy, Portugal and Spain to pay their bills and keep lenders calm. Those days could be drawing near. As more signs of a global economic slowdown emerge, many economists think stagnant economies like those of Ireland, Greece and Portugal won't last long before they can't afford to pay down the interest on their loans, let alone the actual debt.

Even bigger problems await the global economy if Spain or Italy countries five or six times the size of Greece and Ireland go bust. "If Spain gets hit in the way Ireland was hit, you'll see much deeper effects," says Uri Dadush, an economist at the Carnegie Endowment. The resulting squeeze on European public coffers drastic layoffs, tax hikes, slashed social services, land sales (anyone in the market for a small Greek island?) could add up to even less European consumer spending for years, which would sap demand for foreign exports. The U.S., for example, counts on Europe to buy nearly a quarter of the goods it sells abroad. Emerging markets like China, which so far have been buoyant, may no longer be able to take up the slack. Policymakers there are slamming on the growth brakes as they battle against rising inflation, fueled partly by Western central banks' bond-buying sprees and a drop-off in Western demand for their goods.

In the West, the psychological impact of the Greek crisis is becoming clear. Europe looms large in ongoing budget battles over taxes and spending. In the U.S., Republicans, intent on unshackling the economy from the burdens of Big Government, think Europe's problems are proof that the social state, with all its dole-outs to citizens, has failed. After this year's State of the Union address, the quip by Republican budget buster Paul Ryan that Barack Obama wants to "out-Europe the Europeans" by spending the country to death set off a cascade of Republican finger wagging about wayward Europe. Democrats have their own stories about what did Europe in that tend to place more blame on corruption and greedy banks. What happens to Greece and to Europe in the months ahead could lend credence to either side.

Regardless, politicians in the once rich Western world can't continue to dodge the problems of megadebt. The fixes no longer come cheap, and the repercussions of trying to cut corners are becoming harder to contain. Countries like the U.S. and Britain may not fall into as dire a situation as Greece, but they won't be immune to the loathsome lifestyle changes it takes to climb out of this kind of hole.

It's worth remembering that such chaos can ultimately turn into growth. That's something the East Asians figured out a decade ago when confronted with their own financial crises. Years of wide-open markets and financial folly had led to economic disaster. As a result, those countries abandoned the notion of slaphappy investing and changed the way they save. Now the region is the world's growth engine and the envy of the West.

But through the transition, there was upheaval. Angry populations voting new governments in and out made the path back to growth even harder. Papandreou's biggest challengers aren't sitting on the benches of Parliament or in Berlin. They're standing in the streets of Athens and stewing in their homes while their faith in their government and its foreign lenders to make life better is quickly, and violently, slipping away.
 With reporting by Joanna Kakissis / Athens