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When the people of Greece go to the polls on Sunday to decide on their economic future, they're going to face a really difficult choice. They're being asked to decide whether to accept European demands for further austerity. If they reject those demands, they're likely to be forced out of the euro altogether.
We're torn on how Greeks should vote, because all of their options are bad. Either option is likely to lead to more economic pain, and there's a lot of uncertainty about the long-term results of either decision.
But we thought it would be interesting to write what we felt were the strongest arguments on each side. Matt Yglesias wrote his strongest case for a "yes" vote, while Tim Lee wrote the case for voting "no." But neither one of us is sure that we picked the right side.
The case for "yes"
The best case for a "yes" vote on the Greek referendum is simple: Germany and other major European states will want to make a Greece that votes "yes" look like a success. They'll want to grind a Greece that votes "no" into the dust. And they'll have the power to do.
The truth is that no matter what Greece does, Greece is still going to be a relatively small, relatively poor country with little leverage against either its larger, richer, and more powerful European partners or the financial markets. What those partners want Greece to do is to commit to staying on the euro, commit to running modest but meaningful primary budget surpluses, and commit to pursuing a menu of "structural" reforms of its economy.
But if Greece doesn't do that, then what those partners will want to do is make an example out of Greece to ensure no other Eurozone member ever dares to consider following their lead.
The European powers-that-be have strong incentives to make a "Grexit" as painful as possible. If Greece experiences rapid recovery post-eurozone, that will make the Eurozone project look misguided and call the continued membership of Portugal, Spain, and other states into doubt. That would have negative consequences for the citizens of those countries, while also making politicians in Europe's most powerful countries look ridiculous.
It's true that Greece would be better off today if it had never joined the Eurozone. But as Greek Finance Minister Yanis Varoufakis himself argued back in 2012, "while almost everyone would prefer Greece to have been outside the eurozone, the actual cost of severing Greece will prove equal to that of dismantling the eurozone itself painfully, slowly, catastrophically." Varoufakis' argument at the time was that Greece should therefore default without leaving the Eurozone. This is a perfectly fine idea for Greece, except that Greece's European partners have made it clear that they won't stand for it. If Greece defaults, the European Central Bank will stop providing the Greek banking system with the euros it needs to operate. In that case, the Bank of Greece will need to provide them with some other currency and Grexit will be a reality.
But the terms of the departure will be messy and difficult for Greek citizens. They will receive no leniency in the treatment of euro-denominated debts that they owe to foreigners, and little cooperation in setting up clearing systems for international financial transfers. Rightly or wrongly, Greece will be treated as a pariah that chose to isolate itself from the continent's financial and monetary systems.
If Greece votes "yes" the path ahead is by no means easy but it is easier.
It starts with the fall from office of the current Syriza-led government, whose high-stakes gamble that it could extract better terms from Europe has utterly failed. It will probably be replaced by a new version of the old mainstream coalition that preceded it. That new coalition, by reaffirming its commitment to groveling and doing what Europe wants, can begin to rebuild a little of the good will that Greece has lost during the Syriza months. That won't lead to major concessions in the short-term, but it could lead to more leniency in the months and years that come.
None of Greece's current options look very attractive, and not much about the situation in which Greece finds itself is totally fair. But the best thing Greece can do for itself is to stop worrying about things that are out of its control, and recognize that going along to get along is more likely to work than any of the alternatives.
The case for "no"
The best argument for Greeks to vote "no" on Sunday is simple: the euro is a disaster. And voting no is the quickest way for the Greeks to get out of it.
The euro is a kind of macroeconomic straitjacket. Central banks are supposed to print more money when the economy is in a recession, and print less money when the economy is booming. But the European Central Bank is responsible for the health of 19 different economies, and at any particular point in time they will have wildly different needs.
Right now, Greece is suffering from 25 percent unemployment, while Germany is enjoying 5 percent unemployment. Greece needs more monetary stimulus; in Germany, more stimulus would only create inflation. There's no way for the ECB to craft a monetary policy that will serve both countries well.
This isn't a problem that's going to go away. 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. And as one of the poorest and most isolated of the European economies, Greece is among the most vulnerable.
European elites were aware of this problem when they created the euro, and they had a plan for solving it, under the slogan "ever closer union." The idea 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. The difference is that 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.
That's not how things work in Europe. Germans and Austrians have no interest in paying for welfare benefits for people in Greece and Spain. For that matter, people in Greece and Spain don't particularly want to give up sovereignty to the European Parliament. A European superstate isn't going to happen any time soon.
Matt is right that European elites have an incentive to make a Greek exit as painful as possible for Greece. But Europe can only inflict so much pain on the Greeks as they exit the euro club. Greece is still a sovereign nation, and there are many countries it can trade with outside the European block. Moreover, Europe will have both geostrategic and humanitarian incentives not to push Europe too far.
But the larger point here is that the worst effects of a euro exit would be be over fairly quickly — probably within a year or two. After that, the Greek economy could enjoy significant upsides. With its own currency, it would have a lot more leverage to renegotiate its debt burden. And with its own central bank, Greece would be able to pursue a monetary policy that's more appropriate for the highly depressed state of the Greek economy.
Leaving the euro is hardly a panacea. There's a risk that leaving the euro would produce a severe and protracted panic that's even worse for ordinary Greeks than the endless 25 percent unemployment they're suffering from now. Greece will have to pay higher interest rates for decades after leaving the Eurozone, and it will have to work hard to convince foreigners to take its currency seriously. But in the long run, Greece's future outside the Eurozone is likely to be better than its future inside of it.
