NEW YORK (TheStreet) -- Greece will soon default on its sovereign debt and, mercifully, loosen Germany's grip on European economic policy.
Greece owes 240 billion euros ($272 billion).
In 2011, a bailout imposed a haircut on private creditors and shifted most of Greece's sovereign debt to the so-called troika -- European Union member governments (principally Germany and France), International Monetary Fund and European Central Bank.
Led by German Chancellor Angela Merkel, the troika forced Greece to implement draconian budget cuts and long needed structural reforms, which eased legal restrictions on firing private-sector workers, and reduced public-sector pensions and minimum wages.
Governments can jettison public employees and raise taxes quickly -- deflating their economies -- but structural reforms can take a long time to reignite growth. Consequently, Greece's gross domestic product is down 25% from prior to the financial crisis, and instead of improving Greek solvency, the austerity measures have resulted in the national debt soaring 160% of GDP.
Recognizing this folly, the new Syriza government wants to ease spending cuts. For example, it wants to restore pensions to private- sector workers and slow down the structural reforms. Acknowledging Greece can never repay its debt, it wants to restructure what it owes, which are nice words in diplomatic circles for imposing a haircut on the troika.
Merkel is balking, but sooner or later, the Germans must recognize they can't get blood from a stone and must come up with some face-saving device. For example, forgive interest payments and lengthen maturities on existing debt so far into the future that much of the debt is essentially forgiven.
Without a deal soon, Greece must at least technically default. Its present aid package expires at the end of this month, tax revenue is falling. Subsequently, the Greek government must come up with payments of more than 11 billion euros to the IMF and the ECB.
Without a deal with the troika, Athens could exercise sovereignty, and reintroduce the drachma, convert bank deposits and outstanding debt from euro to drachma and print the money it needs.
Greece would simply join the ranks of EU members, such as Poland and Czech Republic, outside the eurozone, and let the exchange rate for the drachma slide. That would reduce the euro value of what it owes, and impose, albeit clumsily, the debt restructuring. Falling wages and land values, as denominated in euro, would attract new investment and reignite growth.
The Germans could play hardball and take the Greeks to the European courts, demand payment in euro and threaten to throw Greece out of the EU. Merkel, however, had better look at the map. Greece is at the western gate of the Mediterranean and is strategically important to the North Atlantic Treaty Organization .
Amazing how geography can give small countries big leverage with great nations.
Either the Germans will gracefully take the haircut-paper over the mess with a succession of face-saving deals, or accept Greece's departure from the eurozone.
All of that would cause private creditors to get nervous about what Italy, Spain and Portugal owe, and push up the rates those countries must pay to continue borrowing money. Unless the ECB focuses its new program to purchase 60 billion euros in sovereign debt each month in the direction of those countries, they will be forced to restructure their debt as well and rethink their austerity programs.
Both would be a bitter pill for Merkel. Such massive purchases of sovereign debt amount to financing those Mediterranean states governments by running the printing presses, which is something the German polity cannot tolerate. And austerity as a cure for what ails Europe would be once and for all thrown where it belongs -- on the scrap heap of failed ideas.
Angela Merkel has strong-armed the Mediterranean states into debt deals and austerity that are remindful of 18th-century medicine-bleeding patients to restore health.
It's about time Merkel got what she deserves -- a good haircut and discrediting.
This article is commentary by an independent contributor.
Peter Morici is an economist and professor at the University of Maryland and a national columnist.