Europe is caught on the horns of a dilemma.

Just when economists and financiers were dusting their hands over a job well done fixing Greece's economy, they stumbled across an irritating roadblock. From its birthplace, democracy intervened.

In a warning that goes far beyond the continent, European governments have been forced to realize that satisfying bondholders is not always enough. Bondholders have a lot of power but the Greek election reminds us that, when pushed too far, voters have more.

Hardliners, notably from Germany, complain that Greece has already had its bailout and that the rich countries of Northern Europe should now wash their hands of their ne'er-do-well southern neighbour. As Don Murray of CBC News says, Germans would do well to remember they have benefited from bailouts.

But there is a more self-interested reason for them to be charitable: The alternative could be even more costly.

Greece's critics say the country's current financial mess is its own fault because it borrowed too much. By that argument, if Greeks reject the discipline of austerity, they alone should accept the consequences of leaving the euro, the so-called Grexit.

Flawed argument

The argument is flawed in two ways. One is that in the world of finance, borrowing too much money is not just a problem for the borrower. Lenders also take a share of the responsibility, partly by setting interest rates high enough to cover losses from risky loans.

It is written right into the principle of bond lending that some borrowers will default. That is why interest rates differ. In theory, the high cost of borrowing discourages risky borrowers. The high income from those rates pays for a higher than expected rate of default.

For a number of reasons, default is difficult while Greece continues to use the euro. But if it exits the euro and switches its euro-denominated loans into a new currency, it can safely devalue that currency and start afresh. 

The other flaw in the anti-Greece argument is the view that only Greeks will be hurt. The fact is that while the new currency, let's call it the drachma, would make European goods more expensive, the burden of austerity would be gone.

The country would no longer have to sell its public enterprises to the private sector, and most of the money lent to it by European banks and governments would have disappeared.

European pain

If a Grexit happens, European institutions will have lost just as much cash as if they had made a deal to forgive some of the Greek debt. There is no guarantee such a separation would be painless, nor that a post-euro Greece would be a trouble-free, easygoing member of the European Union. The tearing sounds would be loud, both inside and outside the eurozone.

But there is a much worse outcome for the countries of Northern Europe -- if a Grexit is a success.

It is possible that wiping out the debt and revaluing the currency would turn the Greek economy around, spurring the country's key tourism industry, rebuilding manufacturing, creating jobs and transferring wealth from the Mercedes-driving elites to the people who backed the new prime minister.

It is possible that Greeks, having witnessed the pain of economic deprivation and austerity, will find a new resolve. Tried by fire, they could work together and allow their new government a chance to rebuild. Even if they are only partially successful they would be a model for other struggling Southern European economies.

Warning from Piketty

As the best-selling French economist Thomas Piketty has said, one reason inequality is a threat to capitalism is that if enough people feel they are not getting their share they will elect governments that will turn against global capital. If the Greek democratic revolution is a success, how long until a Grexit is followed by a Spanxit, an Itxit or a Franxit?

The deal is far from done and things could still go wrong. But no wonder most European governments say they are willing to negotiate better terms that will improve the lives of ordinary Greeks. No wonder bond markets are so confident the Europeans will offer a deal satisfactory to the new Greek prime minister Alexis Tsipras. The alternative is even less appealing.

For those of us who may have grown cynical about democracy and the power of money to influence elections, the Greeks have taught us a wonderful, upbeat lesson. People will accept a lot of hardship in exchange for stability, but they will only be pushed so far.

This is a warning to financial markets everywhere that for good or ill, in a democracy voters get the final say.