A few years ago, I was convinced that Greece would have to leave the European Union within months.  So, I made some bets.  Of course, I lost those bets.

At the time, I attributed my losses to underestimating Europeans’ fear of repeating the 20^th Century’s violence and their conviction that only some sort of union could achieve lasting peace.

That’s true, but I now believe there is more to it.  The Germans’ have recently been playing hardball.  If fear of starting a process that would eventually lead to World War Three was the only motive for their previous flexibility, they would never play hardball.  What was I missing?

There is a long history of governments paying for peace, but that history contains many examples of governments eventually refusing to pay and going to war.  It could be that at some point, war, even if you are likely to lose, is preferable to some price.  This is the “I’d rather die on my feet than live on my knees” argument.

The other possibility is that the payments buy time.  Allowing the paying country to increase the odds of it winning the ultimate war.

Germany is no weak sister, but its banks were.  The years of working with Greece has allowed its banks to reduce their exposure to a Greek default.  Indeed, most of the money from previous “bailouts” ended up helping banks more than Greeks.

I think the Germans finally reached a position where their banks could absorb a Greek default.  That would explain why Germany finally played hardball.

There is still the question of why the Greeks accepted the terms immediately after a public vote against them.  This question may be beyond the capabilities of economic analysis.