What’s “chutzpah” in Greek?

It’s hard to think of a better word to characterize the actions of Greek voters who overwhelmingly rejected the terms of a European Union bailout this past weekend, but who still expects the EU to come to the rescue with billions of euros needed to keep the Greek economy from collapsing. Yet Greece has some defenders among economists who contend that Europe in general, and Germany, in particular, is being hypocritical in demanding that Greece take painful austerity measures — including cutting back its fabulously generous welfare state — in return for yet another bailout.

Thomas Piketty, the best-selling French economist, argues that Greece should be allowed to renounce its debt as freely as Germany did in the past. “When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: What a huge joke!” Piketty said an interview. “Germany is the country that has never repaid its debts. It has no standing to lecture other nations.”

The wonderfully named political scientist Kindred Winecoff, writing at the Duck of Minerva blog, shows that Piketty is ignoring major differences between Germany in 1953, when it was offered debt forgiveness by the London conference, and Greece today.

In the first place, most of the debts that Germany renounced were a result either of the reparations from the Treaty of Versailles or of Nazi rearmament. Neither obligation was seen as morally binding on a postwar democratic German government. The case of Greece, which is in the red because successive governments have provided social welfare payments to the voters that they could not afford, is rather different.

Second, and more importantly, “Germany had spent the preceding eight years under military occupation that enforced top-to-bottom political and institutional reforms.”

This process may be compared to the kind of reorganization that a bankruptcy court imposes on a company under Chapter 11 of the U.S. Bankruptcy Code. It is precisely this sort of reorganization to which the Greeks are not submitting.

Greece is, of course, free to do what it wants; it’s a sovereign country, after all, in a world in which the use of military force to collect debts is no longer considered acceptable (as it was in the days of gunboat diplomacy in the 19th century). But it should not expect that its choices will be cost-free. Sooner or later, whether as part of the Eurozone or not, in the EU or out, Greece will have to make some hard choices to bring its governmental spending (high) in line with its economic productivity (low).

That will require the kind of cutbacks in benefits that will be a bitter pill to swallow, but that is part of the long-term cure for what ails the Greek economy. The Greek government also needs to trim back regulatory burdens and lower taxes to boost incentives for growth while doing more to collect taxes that are owed, even if part of this advice (cutting taxes) runs counter to the green eyeshade orthodoxy being pushed by the EU. Standing pat isn’t an option, not when the economy is on the brink of collapse.

The EU will be making a fateful mistake if it caves under the pressure of the leftist Greek government and its populist cheerleaders and offers more money without meaningful preconditions. That, in fact, is more likely to lead to the collapse of the euro than hanging tough with Greece, because knuckling under to Greek demands will only lead to similar expectations from other financially strapped states such as Portugal and Italy which are being crushed by unsustainable levels of public debt.