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Since the beginning of the euro, Germany has become some 30% more productive than Greece. Very roughly, that means it cost 30% more to produce the same amount of goods.
Labor costs must fall by a lot. And not by just 10 or 15%. But if labor costs drop (deflation) then that means that taxes also drop. The government takes in less and GDP drops.
It looks like Greece will have to eventually leave the Euro someday. Just imagine the legal bills involved because all the contracts are in Euros. That will be a great day for the lawyers.
So in the meantime, banks that have pledged to refinance (e.g. are holding Greek government bonds) are stuck in a game of Prisoner's Dilemma where each side is waiting for the other to engage in mutually harmful retaliation.
(Prisoner's Dilemma is a popular Economics/Political Science stratagem taught to university students. It is a study of BEHAVIORAL economics rather than RATIONAL economics and was popularized during the Cold War to study the effects of Mutually Assured Destruction). The emphasis on behavioral economics is not accidental - studies have repeatedly shown that actors rarely act in their best, or rational, interest.
Here is how one analyst describes the current situation:
“From an individual bank’s perspective, it would be great to get rid of the sovereign debt,” Hoffmann-Becking said by telephone. “However, if everybody did it you’d have a rapid collapse of the government bond market and then you’d have the default. And in the default, the fact that you have no sovereign debt actually doesn’t help you at all.”
http://www.bloomberg.com/apps/news?pid=20601010&sid=aVTX9yKZzdJ4
