Why does everyone equate Greece defaulting on its debt with Greece leaving or being kicked out of the euro? The two steps are completely separate. If Illinois defaults on its bonds, it does not have to leave the dollar zone -- and it would be an obvious disaster for it to do so.I would agree with him, except that the problem in Greece runs deeper than just a sovereign default. My response from the comments.
But the Greeks seem unwilling to vote for a government that would take the actions needed to stay in the euro zone. If the Greeks default on their euro debt, they will get no new infusion of capital, because they will have broken all trust with their neighbors. Their only way out would be real structural reform. Such reform would include reducing the wages of workers, payments to pensioners and hiving off state businesses. There is no political will to do so. The leftists actually think they can threaten/blackmail the Germans into giving them an endless supply of euros. That's not going to happen. Result, Greece leaves the euro; not because of the debt default, but the refusal to deal with its root causes.So back to Illinois. What would happen if a state defaulted and did nothing about, continuing deficit spending? Is there a precedent? In the 1840s several states in America defaulted on their debts after investing heavily in canals and railroads. Why can't Jerry Brown learn any history? Arkansas, Florida, Michigan, Mississippi and Louisiana all defaulted on their debts to some extent. But life went on, the states were forced to retrench their spending, and most states passed reform measures that limited debt and gave priority to debt repayment. The difference today, is that states are in debt from high operating expenses. If they were to default, then only a reduction of operating expenses would save them. Even if the federal government were to bail out Illinois or California, such a bailout would be unsustainable without real reform, because the state governments of these two deep blue states have the Greek problem, an overpaid, burdensome state workforce. But a default would force real reform, because these states aren't leaving the dollar zone.