A Return to the Drachma Would Be Difficult, Damaging, and Dangerous
Rather than leave the eurozone, Greece should seize the opportunity to make real changes
May 16, 2012
Is exit the only option? The path to the drachma can seem very tempting. But, the reality will prove difficult, damaging, and politically dangerous. Stay or leave, Greece faces a period of real austerity. Government revenues do not cover pension costs, government salaries, or other government expenses.
Can the Greeks weather the economic storm? Can the Greeks create the institutions that will lead to long-term growth—including a tax and spending system that works? There are skeptics. American standup comics warn against opening an H&R Block franchise in Athens—after all nobody pays taxes.
There has to be a better way. Rather than leave the eurozone, the Greek economic and political leadership should seize the opportunity to rebuild a civic culture that will support stable finances and long-term growth.
Greece carries a heavy responsibility for its own problems. They borrowed heavily to live beyond their means. They tolerated rampant tax evasion. They worked (with the help of a major American financial institution) to hide the seriousness of their financial calamity from international and domestic advisers.
Greece does not bear all the blame. Lenders should have been more vigilant. Countries joined the eurozone that did not meet the standards for debt and deficits. There was too little thought to what made an optimal currency zone. Intra-eurozone trade and current account balances were ignored for too long.
Yet, if they leave the consequences will go well beyond austerity. Cascading defaults—including on funds borrowed from the International Monetary Fund—will shut Greece out of international financial markets. Foreign Direct Investment will evaporate. Greece may not have a treasury that can limit capital flight by imposing capital controls.
If Greece stays, it cannot be expected to survive alone. There will be austerity—it must be moderated and fairly shared. The renewed European emphasis on growth should be rapidly applied to Greece. There needs to be a European effort to stimulate growth and the creation of new, Greek institutions.
A Greek exit coupled with across the board defaults will have a potentially devastating impact on the eurozone. Even if Europe's financial fire walls prevent contagion from taking place, the European project will be tarnished. Starting in 1870 with the Franco-Prussian War, Europe lived through three civil wars in less than a century. Looking forward, Europe should prove that peace and prosperity are its future, a future that includes Greece.