The Case Against Terror


Germany’s vice chancellor says that a possible Greek exit from the euro has “lost its terror.” Paul Krugman isn’t happy about that:

I find their lack of terror … disturbing.

I’m not saying that Greece should be kept in the euro; ultimately, it’s hard to see how that can work. But if anyone in Europe is imagining that a Greek exit can be easily contained, they’re dreaming. Once a country, any country, has demonstrated that the euro isn’t necessarily forever, investors — and ordinary bank depositors — in other countries are bound to take note. I’d be shocked if Greek exit isn’t followed by large bank withdrawals all around the European periphery.

….My advice here is to be afraid, be very afraid.

Fine. I’m afraid. But here’s my question. Like Krugman, I find it hard to imagine a scenario in which Greece stays in the euro. But is there any way for Greek exit to happen in some non-scary way? The problem of contagion remains real no matter how Greece leaves, and the problem of panic probably isn’t solvable either. After all, Greece will leave the euro if and when other countries refuse to pony up more aid, and if that happens then Greece is doomed. What’s more, this isn’t the kind of thing you can plan for. Any planning for a Greek exit would inevitably become public very quickly, and that would do nothing except generate panic even sooner than the actual exit itself.

So if Greek exit really is inevitable, what’s the argument against the German position? Why not go ahead and talk about it soothingly, do whatever contingency planning you can behind the scenes, and then hope for the best?

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