Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands. And even the most ardent supporters of the EU should be breathing a sigh of relief.
Of course, that is not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.
However, the campaign of bullying — the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office — was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.
What is more, they were not. The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding.
A “yes” vote in Greece would have condemned the country to years more of suffering under policies that have not worked and in fact, given the arithmetic, cannot work.
Austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose.
A CHANCE OF ESCAPE
The landslide victory of the “no” side offers at least a chance for an escape from this trap.
How can such an escape be managed? Is there any way for Greece to remain in the euro? And is this desirable in any case?
The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank (ECB) cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: If it resumes normal financing it will as much as admit that the previous freeze was political, but if it does not, it will effectively force Greece into introducing a new currency.
Specifically, if the money does not start flowing from Frankfurt (the headquarters of the ECB), Greece will have no choice but to start paying wages and pensions with IOUs, which will de facto be a parallel currency — and which might soon turn into the new drachma.
Suppose, on the other hand, that the ECB does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth.
In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the IMF, had concluded independently that Greece’s debt cannot be paid.
Will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?
BEST OF THE BAD?
I have no idea — and in any case there is now a strong argument that Greece’s exit from the euro is the best of bad options.
Imagine, for a moment, that Greece had never adopted the euro, that it had merely fixed the value of the drachma in terms of euros. What would basic economic analysis say it should do now?
The answer, overwhelmingly, would be that it should devalue — let the drachma’s value drop, both to encourage exports and to break out of the cycle of deflation.
Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move — after all, any hint of euro exit would set off devastating bank runs and a financial crisis.
However, at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid.
Why, then, not go for the benefits?
Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-2009, or Argentina’s abandonment of its one-peso-to-one-dollar policy in 2001-2002?
Maybe not, but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.
And let’s be clear: If Greece ends up leaving the euro, it will not mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over.
If they cannot make a go of Europe’s common currency, it is because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.
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