The people of Greece have rejected the debt-finance terms offered by the "troika" (European Central Bank, IMF, European Commission), which would have required the country to slash its social services as a condition of continued loans to support the debt that previous governments amassed in the runup to the 2008 crisis.
The austerity imposed on Greece as a condition of the financing since its first bailout has had terrible human costs — more than 40% of its young people are unemployed, and there have been ongoing food and health-care crises, as well as a high-profile shutdown of the country's national broadcaster, which silenced a major critical voice in the national conversation over the punishment the country was enduring.
Greece's previous governments ran up the country's huge debts through sweetheart deals with the country's richest corporations and citizens, the starving of its tax-collection bureau (which made it trivial to avoid taxes), and through a mass-scale accountancy fraud designed by Goldman-Sachs to the enormous benefit of the firm and its investors.
The austerity imposed by Greece's creditors was purely punitive — no one, not even the troika or Angela Merkel — believed that Greece would ever be able to pay back the money it owed. The slashing of Greece's public ownership and public benefits was exemplary: it was meant to serve as a lesson to other debtor states in the Eurozone (Italy, Spain, Ireland, Portugal) who might have contemplated walking away from their debts to investors.
More than 60% of Greeks — from every region in the country — rejected austerity, arming Syriza, the country's self-described "radical left" ruling party, with a powerful negotiating tool to take back to the troika. As the government's leaders said in the runup to the referendum, the no vote means that they can tell their negotiating partners that the people of Greece refuse to accept austerity-as-normal for the future.
The Eurozone finance ministers are already meeting to discuss what will come next. Gaming this out is hard, but this analysis by John Quiggin on Crooked Timber is a pretty good set of possible outcomes, with their up- and downsides for all concerned.
The austerity and debt hawks like to thumbnail their positions by comparing states to households: a family can't run a deficit indefinitely without a reckoning. Families need to get their money from somewhere. Families must repay their debts. But states aren't families: families can't issue their own currency. Families don't have central banks. Families are subject to inflation, but have no say over inflation. Families can't pass laws. Families aren't sovereign.
States, whatever they are, are not families.
Likewise, the Greek debt negotiations have been painted as "Germany vs Greece." It's true that Angela Merkel and many Germans have supported harsh conditions on the people of Eurozone debtor states, and that, on average, Germans are more likely to be lenders than borrowers. It's true that Greece forgave Germany's war debts in 1953, and again after reunification in 1990.
But Greek debt and a Greek default have much more to do with global investors than the savers of one EU country.
Whatever happens next will have wide repercussions — and not just for the poorest and most indebted EU states, but for the whole global debtor-creditor/investor-citizen dynamic.
For the other side (effectively the Troika and the German government), since Syriza's move has already been made, the problem has now been reduced to one of decision under uncertainty, which is something I am comfortable with. More precisely, it's a choice between a "safe" option, with an outcome that is fairly predictable, and a "risky" option where the outcome is uncertain.
The safe option for the European insitutions is to cave in, write off lots of debt and lose a lot of face.
The risky option is to foreclose, and force Greece out of the eurozone, and leading to a repudiation of debt. The possible outcomes involve several interdependent sources of uncertainty
Whether the Greek economy does so badly that the Greek public regrets their choice and throws the government out at the next opportunity
Whether exit from the eurozone is followed by exit from the EU
Whether the process generates a broader financial crisis
Greece, decision theory, and the sure-thing principle [John Quiggin/Crooked Timber]
Greek referendum: No campaign storms to victory with 61.31% of the vote – as it happened [Graeme Wearden and Julia Kollewe/The Guardian]
(Images: 20150703 Greek Referendum Demonstration for NO syntagma square Athens Greece, Ggia, CC-BY-SA; Greek referendum 2015 map, Furfur, CC-BY-SA)