clock menu more-arrow no yes mobile

Filed under:

Greece should leave the eurozone

Handout/Getty Images

Greece and the eurozone are like a couple trapped in a bad relationship. Almost everyone agrees they would have been better off if they'd never gotten together in the first place. Both sides have been unhappy for years. Neither side trusts the other. Years of accumulated resentments make it unlikely that they'll ever be happy together. But neither party is prepared for the pain of actually going through the breakup.

Individuals in this kind of dysfunctional relationship usually find they're better off in the long run if they go their separate ways. And the same is likely true of Greece and the eurozone. Leaving won't be easy — indeed, exiting the eurozone would trigger a financial crisis that will set the Greek economy back by months, if not years. But it would also let the Greeks once again be the masters of their own economic destiny. And in the long run, that's likely to be better for both Greece and the rest of Europe.

The euro has been a disaster for Greece


The euro is a macroeconomic straitjacket that has been crippling the Greek economy for the past seven years. Central banks are supposed to print more money when the economy is in a recession, and print less money when the economy is booming. Right now, Greece is suffering from 25 percent unemployment, a sign that the country desperately needs monetary stimulus.

The problem is that Greece shares a currency with the rest of the eurozone, and stronger stimulus might generate too much inflation in countries like Germany, which is enjoying a 5 percent unemployment rate. So the European Central Bank has done too little to support Greece, worsening the depression there.

This is a long-term problem. Europe will have more economic downturns in the coming decades. And each time this happens, the economic straitjacket of the euro will make it harder for some of Europe's economies to recover as quickly as they could. As one of the poorest and most isolated of the European economies, Greece is among the most vulnerable.

If Greece had its own currency, it could boost the economy by expanding the money supply. That would lower the value of Greece's currency, making everything Greece sells cheaper on world markets and thereby boosting exports. It would also boost domestic spending, as well as allow the government to pay off some of its debts with printed money.

This policy wouldn't be perfect — it would likely generate some inflation, and the real wages of Greek workers would go down with the value of the currency. But that would be far preferable to the suffering of the past five years, when the unemployment rate has been on par with the worst years of America's Great Depression.

Germany has made it clear it's not going to cut Greece any slack

German Chancellor Angela Merkel. (Michael Gottschalk/Photothek via Getty Images)

The argument for staying in the eurozone is that major European countries have a lot of power to help or harm Greece. If Greece cooperates with its European partners, they might reciprocate by helping Greece dig its way out of its hole more quickly, whereas if they leave, creditor nations will want to make the process as painful as possible to deter other poor countries, like Portugal and Spain, from following their lead.

But this weekend's negotiations make it clear that Germany and its allies don't intend to cut Greece much slack. On Friday, Greece essentially capitulated to its European creditors, agreeing to the vast majority of the terms Europe had offered two weeks earlier. That wasn't good enough for Germany, which demanded that Greece make further concessions.

Germany's position isn't totally unreasonable. The Greek economy has deteriorated sharply over the past two weeks, so Greece now needs a bigger bailout than it did then. And Greece's erratic decision-making process over the past two weeks has done little to instill confidence that it will follow through on its commitments.

But that's another way of saying that Greece and Germany have a relationship that's broken beyond repair. Whether you want to blame Germany for being too stingy or Greece for being too erratic, the reality is that neither country trusts the other. Voters in Germany see Greece as unreliable and ungrateful. Voters in Greece see Germany as stingy and domineering. That underlying political reality is going to poison all future negotiations between the two countries.

And if Greece stays, the two countries are going to have high-stakes negotiations for years to come. Germany and other European creditors don't trust Greece to keep its promises, so they're planning to keep Greece on a short leash. Greece will likely be forced to come back to its European partners, hat in hand, every time it needs a new round of financial assistance.

The euro needs a United States of Europe to work, and that's not likely to happen

The European Parliament has a lot less power than the US Congress. (Michele Tantussi/Getty Images)

The European elites who created the euro knew that having independent countries share a common currency could create problems. Their solution, under the slogan "ever closer union," was to gradually make Europe more like the United States. In the US, we also have a single central bank setting monetary policy for 50 state economies. This works pretty well because America has a much more integrated economy. Much of the tax collection and government spending in the United States happens at the federal level. People regularly move from one state to another in search of work. The huge economic disparities we see between Germany and Greece today don't tend to exist among American states.

The problem is that this kind of integrated economic system ultimately requires an integrated political system. Americans see themselves as Americans first and Floridians or Oregonians second. People in wealthy Connecticut don't get too outraged that their tax dollars are subsidizing people in West Virginia.

The acrimony of the past five years makes this vision seem even more far-fetched than it did when the euro was created. A majority of Germans want Greece to leave the eurozone. Why would they sign up for a system in which rich German taxpayers subsidize poor Greek ones forever?

Leaving means Greece won't be able to blame Germany for its problems anymore

Many Greek voters voted "no" in the recent referendum in the mistaken belief that they could end austerity while staying in the eurozone. (Michael Debets/Pacific Press/LightRocket via Getty Images)

Greece's Syriza party came to power earlier this year by campaigning against austerity and the European powers that — in the view of many Greeks — had foisted that austerity on them. But the reality is that much of the austerity of the past five years was unavoidable. By 2010, Greece was out of money, and private sector creditors weren't willing to lend it anymore. So without European help, Greece would have been forced into more and harsher austerity over the last five years.

Leaving the eurozone won't save the Greeks from further austerity — it might actually force even steeper cuts, at least in the short term. But it would also hold out the prospects of an economic recovery, which would improve the budget situation, and most of all would once again make Greece the master of its own economic destiny. The Greeks need to have a debate about how to get their fiscal house in order and about how to generate sustainable economic growth. That debate is likely to be more productive once it's clear that reforms are a matter of economic necessity, not something that's been foisted on them by Berlin.