If Europe wants Greece to survive as part of the eurozone, its member countries are probably going to have to commit to a nearly open-ended flow of fiscal transfers, just as California is implicitly committed to an open-ended flow of fiscal transfers to Mississippi.This seems likely to be correct. Europe has been playing at being half a super-nation, half a confederation of sovereign nations. But now, rubber, meet road; road, rubber.
The effect of all this fiscal tightening? Magic growth! A huge amount of heavy lifting, in terms of making the numbers work, is done by the debt sustainability analysis, and specifically the assumptions it makes. Greece is five years into a gruesome recession with the worst effects of austerity yet to hit. But somehow the Eurozone expects that Greece will bounce back to zero real GDP growth in 2013, and positive real GDP growth from 2014 onwards.Maybe Greece's austerity will bring so much "confidence" pouring into the country that they can bottle and export it, like olive oil.