At this point, the Greek debt crisis probably seems like it's been going on forever. It hasn't, but it seems to defy resolution. Last Friday, the country finally defaulted, in a strictly technical sense, on part of its sovereign debt — an outstanding slice of private bondholder debt that was insured by the dreaded credit default swaps. The agency that determines whether those swaps — which amount to a bet that a country won't be able to keep up with its bond payments — should pay out said, "Yep, Greece has defaulted." Felix Salmon and John Carney provided a good explanation on Marketplace at the end of last week.
The main issue for Greece is just how long it's going to have to suffer. The austerity measures that are being forced upon it in exchange for more bailout money from the European financial authorities are setting it up for a decade of pain. On the plus side, Greece stays in the eurozone and has access to financing through the currency union; something can always be worked out...however...s-l-o-w-l-y. On the minus side...well, there's all that austerity and aforementioned pain.
Now along comes Megan Greene, who works for Nouriel Roubini (the financial crisis' prophet of doom), arguing at Bloomberg View that Greece might be better off leaving the euro:
Greece faces a stark choice about how to return to growth. It can continue along its current path of endless austerity aimed at engineering an internal devaluation. For a country that cannot control its exchange rates, this is the only way to regain competitiveness relative to other countries.
This option would probably involve a decade of depression and is therefore likely to be politically untenable....Reforms would be fought at every turn and things could get much worse. The alternative to internal devaluation is for Greece to default on its debts and abandon the common currency. A new drachma would depreciate massively, boosting Greece’s competitiveness almost overnight.
Exiting the euro area is not an easy option. It would spark a sovereign default, a run on banks, bank defaults and capital controls. But increasingly, these things look like they may happen in Greece whether the country sticks with the euro or not. If all the worst effects of abandoning the euro are likely to happen regardless, then Greece may as well benefit from a nominal devaluation.
Sounds harrowing? That's because it would be harrowing. But here are three reasons why Greece should do it:
1. It would preserve democracy. Greece lost its elected prime minister last year as part of the ongoing crisis. He wanted to submit austerity to a vote. The people with the money didn't. So he was effectively replaced by a more compliantly "technocratic" official. Technocracy is sweeping the European periphery right now, as the rich countries of northern Europe try to compel the poorer countries of southern Europe to accept draconian budgetary measures in exchange for the promise of funds if the Greek crisis spreads. Europe could continue in this manner, or it could stop trying to save the euro and work on preserving democracy, which is arguably more important than a currency union.
2. Greek would regain its independence. Greece is currently a ward of the European Union. As Greene points out, a return to the drachma, Greece's pre-euro currency, would steer the country toward the kind of bootstrapping internal reforms that it was able to avoid due to the easy borrowing the the euro allowed.
3. Greece could reform its own welfare state. A big advantage of Greece being part of the eurozone was that the country could leave behind a history of political strife and instability and develop the kind of social institutions that are common across Europe. Unfortunately, it was ability of Greece — a country with an economy that's nowhere as productive as Germany's — to borrow at German rates that enabled this essential reform. It was political imperative but economically unsustainable. A new drachma would demand that Greece transform its economy to support its modern welfare state with true gains to GDP and an economy that's not so dependent on tourism and agriculture.
To stay or leave the euro has been a pretty divisive question for those watching the Greek crisis. There's not a lot of gray area. On the Don't Leave side, the concern is that a true default would rapidly spread through the European banking system and affect Italy, Spain, Portugal and probably Ireland (not to mention banks in France, England, and the U.S.). On the Do Leave side, the argument is that Greece could be led through an orderly default by the same institutions that are now engaged in what looks like a neverending game of "extend and pretend." Can you really stall for a decade or more?
In the end, Europe may not be able to afford to keep Greece afloat forever. So the question naturally comes up: Isn't it possible that despite all the pain, Greece will just leave the euro eventually anyway?