What is going on in Greece is not an historically big event. It is in fact quite common in the history of nations, especially in the 20th century. Prior to that, most nations had to live with in their means and balance the difference through either inflation, debasement, increased taxes, or renegging debts.
The Greeks last week voted to reject austerity. In doing so, they voted to accept austerity. They are just too stupid to know it. They really do think they can just vote prosperity for themselves. By rejecting the bailout provisions, they reject additional “loans” so they are in effect on their own.
Under the Euro, they cannot just print money. The government also cannot borrow more money because no creditor wants to add to their already unsuportable risk. Their only other options are increasing taxes and renegging obligations. Both of those options are very painful forms of austerity. The difference is that the pain will be felt by some economic sectors and not others. People who saved money in the banks will be hit hard. They will bear a huge burden in the wealth transfer from themselves to people on the government teat (pensioners, public employees, the dole). The most likely debts to be renegged are those to foreign banks (no real downside to this).
The real question is, what happens then? Can the Greek government maintain itself without foreign loans?
I did some back of the envelope analysis of the Greek economy. They have somewhere on the order of 317 Billion Euros in public debt, generating an annual debt service of 12 billion euros (does not include paying back any principle). Their current budget deficit is only 6 billion Euros. Thus, by renouncing their public debt, they would be able to sustain their total current spending without any budget cuts, in perpetuity and have a surplus. They wouldn’t even need to leave the Euro zone or switch to using Drachmas again. They wouldn’t need inflation to balance their budget.
That won’t make their creditors very happy, but it’s not like they can do anything about it.
Their only real problem is that any annual suplus would be irresistable to public service unions who would demand raises and bonuses. Then Greece would be in a deficit situation again and no creditors would loan them money to maintain their new lifestyle.