We must not make the mistake and think that countries cannot go belly up. Why? Well, frankly because they can.

Argentina (2001) may be the best-known recent example, but it sure is not the only example. Russia (1998), Ecuador (1999), Ukraine (1998 and 2000) and Indonesia and Pakistan (both in 1999) are just a few others.

True, those are all non-Western countries. But again, this does not mean the Western world is somehow immune to the bankruptcy virus. Why? Again, because frankly it is not. It is just that in our lifetime no Western country has defaulted on its debt. But look beyond the last three decades or so and it immediately becomes crystal clear that the Western world is just as prone to default as any other part of the world.

Italy, Poland and Rumania – all three EU member states nowadays and even euro area members (Italy) – have defaulted on their debt. Italy did that in 1940, so one could relate that to the onset of the Second World War, but Poland and Rumania both defaulted in 1981. Even Germany has defaulted, in the first part of the last century, via hyperinflation in that country.

The Greek way

Greece itself – the reason for me writing this column is of course the euro crisis – is also a good example. The Hellenic Republic has been in default for a large part of its modern history as an independent country. If it was not for the EU, other euro area member states, the European Central Bank and the International Monetary Funds, Greece would have defaulted once again months if not years ago.

Admittedly, that was Greece from before the European monetary union not the new Greece. But let us take a look at that modern Greece.

On every measure and even working with the uber-optimistic assumptions about economic growth in the years to come, the Greek national debt is not sustainable. The debt is increasing further because Athens in not able to balance its budget. Yawning deficits are forecasted for a long time.

The country cannot export its way out of these dire straits as a decade of too fast wage increases without accompanying productivity leaps has left the country’s companies uncompetitive. It will take just as long, in the best case, to solve that problem. Sadly, time is not a luxury Greece has.

Fighting

The average Greek meanwhile is not working but demonstrating and fighting in the streets and when they are not on the streets, the Greeks are moving their savings out of their own country and into the Swiss franc, gold, basically everything non-Greek.

The country’s economy shows closer resemblance with an ever-larger number of third world countries than with its euro partners. There is not much hope (or should I say none whatsoever) that the economy will surprise us all in a positive way any time soon.

In short, bar some deus et machina event (like the rest of the euro area giving Greece an gift of some 300 odd billion euro to pay off its debts, something that is even less likely to happen than the French government holding a meeting in English for example) Greece, and maybe Portugal as well, will default sooner or later.

The sooner the other European political decision makers acknowledge that, the better. Because only when they do so, they could be ´accused of´ being realistic and only then one would have reason to be optimistic about euro area surviving in the medium and long term.

Answer around the corner (sometimes literally)

European political decision makers need not look far for an answer to the question what to do. Every town, city or sometimes even a village in Europe has the answer as every town, city and sometimes even a village in Europe has its own fire department.

Fire department? Yes, indeed. What do the firemen do when they arrive at, let us say, burning house that is beyond saving? They pour millions of liters of water, sometimes for hours and hours, on neighboring properties in order to save them.

This is what Europe needs to do:

First, accept the fact that Greece and probably Portugal as well, is too big a mess to save.

Second, expand your emergency fund and use the money to pre-emptively save Spain and Italy (ok perhaps you can try to keep Portugal from falling into the abyss also) thereby saving Europe’s banks as well. Sure, they will feel the pain from Greece going into default, but let us not forget two things that are relevant in this matter.

The first one is that banks, up to a certain point, have gotten themselves into problems. They should have paid more attention to the real situation on the ground in Greece and assessed the possible risks involved when buying Greek bonds instead of treating the Greek bonds as Bunds with funny looking letters on them.

Second, Europe has been saving Greece for over a year now. The ECB has been buying Greek bonds as well. Every prudent bank has used that time to lower its exposure to Greece. Those banks that have not or even have increased their exposure (betting Europe will never let Greece fail and thus pocketing some very, very nice returns (2 year Greek bond come with almost 30 percent interest rate nowadays) well, they basically deserve to get burned.