By New York Times Editorial Board
When they introduced the euro in 1999, European leaders said the common currency would be irreversible and would lead to greater economic and political integration among their countries. That pledge of permanence, long doubted by euro-skeptics, seems ever less credible.
While the eurozone may have temporarily avoided a Greek exit, it is hard to see how a deal that requires more spending cuts, higher taxes and only vague promises of debt relief can restore the crippled economy enough to keep Greece in the currency union. On Thursday, the Greek Parliament passed a second set of reforms required by the country’s creditors. Other changes, like higher taxes on farmers, are expected later in the year.
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The combative finance minister of Germany, Wolfgang Schäuble, has further undermined confidence in the euro’s cohesion by saying that Greece would be better off leaving the common currency for a five-year “timeout.” As a practical matter, an exit from the currency union would almost certainly be permanent, since readmission involves a grueling process. The eurozone requires new members to keep inflation below 2 percent and to have a maximum fiscal deficit of 3 percent of gross domestic product and a public debt that is no more than 60 percent of G.D.P. The plight of the Greeks has made countries that do not use the euro, like Poland and Hungary, far less eager to join the currency union, which has come to mean a loss of sovereignty and a commitment to austerity, regardless of economic reality.
Of course, the euro was never entirely about economics. European leaders believed the single currency was a big step toward creating an irrevocable alliance among countries on the continent. But many experts warned that it could make its members less stable unless it was followed by a tighter political and budgetary union. Since that did not happen, the currency union was left fully vulnerable to economic crises and to the will of Europe’s more powerful economies.
All those fears have played out in Greece, even as the threat of exits from the euro hangs over other weakened countries, like Italy, Portugal and Spain. Senior leaders in Germany, Finland and Slovakia who have publicly suggested a Greek exit seem to think it would scare weaker economies into accepting more austerity. That may not be necessary; some radical parties in those countries are already openly talking about leaving the euro.
The question now is what is the cost of leaving? Can a modern economy withstand the immediate damage of an abrupt currency change if the benefits of devaluation and regaining full control over fiscal and monetary policies could be limited and could take years to realize?For example, returning to the drachma, which would trade at a deep discount to the euro, could help the Greek economy by making its island resorts, olive oil and feta cheese cheaper for tourists and foreign buyers. The country would also be able to control its own monetary policy, by pumping more money into the economy to stimulate lending rather than relying on the European Central Bank, which until recently has done too little.
But leaving the euro would mean few foreign institutions and investors would be willing to lend to the government, possibly for many years after exit. That could make it harder for the Greek government to buy essential imports like medicines, oil and gas. The financial system would most likely collapse under the strain of bank runs. Many Greeks fear that a return to the drachma could also lead to runaway inflation if the country’s central bank prints too many drachmas to prop up the economy. And that doesn’t even account for logistical challenges like redenominating contracts and printing new paper currency.
As bad as an exit could be on the debtors, the creditor countries like Germany could also be damaged. They would lose most of the money they lent to the troubled nations in the last few years. The government of Greece owes more than 300 billion euros ($326 billion), most of it to other European governments, the International Monetary Fund and the E.C.B. It is also possible that a Greek exit could strengthen the euro, which would hurt exporters in other eurozone countries by making their goods more expensive on the world market.
Given all the immediate losers in the Grexit scenario, the creditors would be foolish to make it inevitable — as the latest bailout terms appear to do. What they should be doing is changing the economic policies that have turned the currency union into a debilitating trap that countries cannot escape without suffering even more pain.
