To save Europe from itself, Greece should leave the euro
The eurozone is caught in a nightmare. A Grexit would wake the continent up.
This Sunday, the Greek people will finally face a decisive choice, yay or nay, to stay in the eurozone. In the humble opinion of this writer, the Greeks should reject Europe's terms, ditch the euro, and take their chances restarting their own currency.
I'm certainly not the first or the smartest person to recommend this course. But there's an extra wrinkle to add: Along with its own self-preservation, Greece should do it for the sake of its fellow European nations, since a Grexit might just shock Europe out of its crazed economic murder-suicide pact.
One could argue that, months ago, Greek Prime Minister Alex Tsipras should have done a better job explaining to his country the bind it was in. Tsipras' Syriza party swept into power promising to end European-imposed austerity, but not promising to leave the European currency union. But this mandate crucially hinged on convincing the European chieftains — the International Monetary Fund (IMF), the European Central Bank (ECB), and eurozone leaders — to drop (or at least significantly alter) their calls for Greece to slash safety net spending and hike taxes.
It's now abundantly clear Europe isn't budging, so the mandate Tsipras and Syriza were elected to carry out literally isn't possible. But the ability of the Greek government to continue functioning depends on the bailout funds from the IMF and the eurozone creditors. And the ability of Greece's private banks to continue functioning depends on the thin trickle of in-flowing capital the ECB has provided them. With the complete collapse in talks that occurred over the weekend, all of that is now gone. The only hope of restarting the talks is for Greece to return to the table with its tail between its legs, ready to do as Europe commands.
If the Greeks refuse to do this, and they should, leaving the euro and restarting their own currency is the only remaining option.
It's important to remember the insane economic unreality that sits underneath this whole debacle. Generally speaking, governments do not depend on a continuous flow of bailouts from their fellows to function. Also as a general rule, any given economy's system of private banks do not rely on a continuous flow of cash from the central monetary authority to keep their heads above water. Most of the time, the underlying economy in question is more or less healthy, providing the banks the necessary investments and the government the necessary tax revenue to function properly.
But in Greece's case, the economy is in a cascading collapse. Capital has been fleeing for years, and unemployment has reached a crushing 25 percent. Spain's unemployment is nearly as bad, but then the ECB never cut Spain and its banks off from new injections of capital, and in fact increased those injections even as it kept Greece on a short leash. Italy and Ireland also received noticeably more help from the ECB than Greece ever did.
Whether or not the ECB — and, by extension, the entire European monetary system — extends aid is really the foundational question here. Critics of the euro often argue that it was a terrible idea from the get-go. But the system actually does have the internal tools to move additional euros into a country that's collapsing. The European authorities simply have to choose to use those tools. As with U.S. monetary policy, the way European monetary policy injects capital into its various economies is hardly ideal, but it is capable of basically keeping an economy's banks afloat — and perhaps even rescuing an economy as a whole.
At the start of 2008, Greece's debt burden was about 108 percent of its economy. As Paul Krugman noted, that's high, but hardly unmanageable. (Japan's has been far higher for a while.) Italy was at 102 percent. And since 2008, Italy, Spain, Ireland, and Portugal all saw their debt burdens rise significantly. Greece and Ireland both went into 2008 with essentially equal gaps between their spending and tax revenues. Greece has, in fact, transformed that gap into a surplus with far more ferocity than any of the other embattled European economies. Furthermore, IMF projections suggest that, along with Greece, those debt levels will all plateau and begin to slowly shrink in the next two years.
So the bailout loans from the IMF and the European creditors — along with the attendant demands for austerity — are essentially an outgrowth of European monetary policy: The loans are necessary to whatever degree the ECB and the monetary system fail to cough up enough capital, then the austerity simply sucks more money out of the nation's economy, further hampering recovery.
In fact, economist David Beckworth plausibly argues that the ECB's failure to sufficiently loosen monetary policy is the fundamental reason the 2008 financial crisis metastasized into an economic collapse in those countries.
The entire European crisis is weirdly post-modern. None of it was necessary, in Greece or anywhere else. Greece's fiscal shenanigans prior to 2008 were real enough, but the just-so stories linking the current economic crisis to those shenanigans are pure moralizing fables. The whole thing is a kind of collective hallucinatory obsession. Even Greece's neighbors, which have endured austerity, have been sufficiently conditioned to see the process as a necessary hazing, and Greece as the malcontent that won't get with the program.
There is almost no conceivable future for Greece in accepting Europe's terms. The austerity will continue to drag down its economy, and the chances the European monetary system will come to its senses are slim. Conversely, a Grexit, while it will be a horrible economic shock in the short term, will give Greece its own currency again and thus a (relatively) clear path to eventual economic recovery. (Perhaps even a fast recovery.)
At this point, a Grexit is unlikely to do serious damage to the rest of Europe's economy. But if Greece pulls it off, the sheer spectacle will render the unthinkable once again thinkable — both for Europe's elites, and for Spain and Italy and the rest. That could be enough of a shock to break this conceptual short-circuit. Which wouldn't simply be a service to Greece itself — it would be a service to Europe as a whole.