It’s Time for Greece to Decide If It’s Leaving the Euro


As expected, the Syriza party won power in Sunday’s election in Greece. Their platform is pretty simple: the austerity forced on Greece after the 2008 financial collapse is no longer tolerable. The Greek economy is in shambles, growth is negative, and unemployment is above 25 percent. Europe needs to forgive its loans to Greece and allow the Greek economy to grow again. Here is Europe’s response so far:

“The Greeks have the right to elect whoever they want; we have the right to no longer finance Greek debt,” Hans-Peter Friedrich, a senior member of [Angela] Merkel’s conservative bloc, told the daily newspaper Bild on Monday. “The Greeks must now pay the consequences and cannot saddle German taxpayers with them.”

In other words: Screw you. The loans need to be repaid no matter the cost. This has been the German position for some time1, and the German position is the de facto European position. So we have a standoff.

It’s unclear what will happen next. There will be negotiations, of course, but the truth is that Syriza doesn’t have much leverage. They can threaten to unilaterally default and leave the eurozone, but that’s about it. A few years ago, that would have meant something because everyone was afraid that if Greece defaulted, perhaps Spain and Italy and Portugal and others would follow suit. This could well have destroyed the euro. Today things are exactly the opposite. Nobody is really afraid that other countries would follow Greece in leaving the euro, but they are afraid that if they make serious concessions then other countries will want their debt forgiven too. And that’s simply not on the German agenda.

So is Syriza serious? Will they really default if they don’t get what they want? Leaving the euro would be no easy task and would cause immense economic pain. The only question is whether the pain would be worth it in the long run. It might be, but it’s hardly an easy call, and it would take real guts for Syriza to call Germany’s bluff and leave the euro. The practical problems alone—how fast can you create new physical currency and coins to replace euros?—are nearly insurmountable. The economic problems of capital flight and being shut out of the international loan market would be colossal. Greeks would take an instant hit to their standard of living, perhaps as large as 50 percent.

But it still might be worth it. The Greeks may calculate that in the medium term, exiting the euro and adopting a devalued currency would allow their economy to become competitive and finally start growing again. Without that, they could be looking at a decade or more of pain and stagnation.

So there’s the question: which road would leave Greece better off in 2025? Years more of stagnation followed by a slow, painful recovery? Or a huge hit now followed—maybe—by a robust recovery? It’s not an easy question.

And of course, there’s also the purely emotional aspect of all this. The Germans are tired of the whining Greeks. The Greeks are tired of living under the German jackboot. It may simply be time for a divorce, consequences be damned. The next few months will be a time of high tension for Europe.

1Ironically, this was the position of the allies toward German reparation debt following World War I, and we all know how that turned out. But no one is afraid of Greece starting a new world war, so no one cares about the irony.