One big question has lurked throughout the euro crisis: Should one or more members quit? Could they?
The most obvious candidate is Greece, the country where the trouble began. It never met the criteria for joining, but its deficit and debt figures were misrepresented. The crisis has inflicted agonies on the Greeks. Pierre Moscovici, the European Union’s economic-and-monetary-affairs commissioner, noted that Greece’s G.D.P. per person has fallen by 45% since late 2009 and unemployment is nearly 50%. This is the worst performance ever by any advanced country.
Now further tumult looms, over funds needed this summer for Greece’s third bailout. The International Monetary Fund reckons that Greece never will repay its debts, which currently amount to 180% of G.D.P. and rising. Nonetheless, euro-zone creditors refuse to accept any debt relief, preferring variants of “extend and pretend” to avoid owning up to fiscal transfers. Meanwhile Greece’s government rejects more austerity, as Greek voters did in a referendum in July 2015, only to have it forced on them all the same.
Even so, Greeks do not want to leave the euro—perhaps because for them it has become like Alcatraz: a prison that keeps people in mainly by making escape too risky. If an orderly procedure for leaving the euro were available, a Greek departure might become more attractive.
Officials say that it cannot be done. Nonetheless, at least twice in 2012, and again in 2015, the German Finance Ministry spoke in favor of it. The technicalities of returning to the drachma could surely be managed. Existing euro notes might continue to be used. The European Central Bank could provide the Bank of Greece with plenty of liquidity. The Greek economy, especially the tourist industry, would quickly reap large benefits from a substantial devaluation.
It was two other considerations that tipped the scales against Grexit. The first was the threat of contagion: If Greece left, the myth that there is no way out of the euro would be instantly exploded, bringing the single currency closer to a fixed exchange-rate regime. The markets might fret that Portugal or even Italy could follow, presaging the currency’s eventual collapse. Greece accounts for only 2% of the E.U.’s total G.D.P.
The second objection is the potential cost of Grexit, not only in support for Greece’s banks and people but through “TARGET” balances at the E.C.B. These reflect inflows and outflows of euros in national banking systems, which usually attract little attention. The numbers have recently risen, though, a sign of renewed market nerves.
© 2017 Economist Newspaper Ltd., London (March 25). All rights reserved. Reprinted with permission.
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