The Unthinkable: Could Greece Actually Benefit from Ditching the Euro?

Talk about drama. German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou emerged from an emergency meeting on Wednesday evening with a bombshell: Greece will have to decide if it wants to remain in the European monetary union. Merkel and Sarkozy suspended all further bailout funds until that fateful choice is made.

What a shocker. The whole idea of a member of the euro zone bolting the union has been completely taboo, even as a debt crisis has raged through Europe for two years. There isn't even any mechanism in place through which a country can exit the monetary union. The fact that this possibility has even been mentioned is a major break with the past that leaves the future very uncertain.

What happens now? Hard to say. It seemed that a referendum Papandreou had called for on Monday to seek public approval of Greece's participation in the latest euro zone bailout scheme, agreed to last week at a summit of European leaders, would be transformed into a vote on the country's continued membership in the monetary union itself. But events in Athens are changing rapidly and unpredictably. Papandreou may lose a confidence vote in parliament on Friday as his supporters melt away over his referendum plan. That raises the possibility of the Greek government falling and possibly a new election being held. Greece's future in the euro zone will remain an unknown as long as the country's domestic politics remain in turmoil.

Yet this whole amazing series of events has raised an important question: Would Greece be better off in or out of the monetary union?

The conventional wisdom has always been that Greece's departure from the euro zone would be a complete calamity. If Greece bolted, it would lose its European bailout and most likely default, sending shockwaves through Europe's banking system and global financial markets. The Greek banking sector would likely collapse, while the government, frozen out of capital markets, might even be unable to pay its bills. For the euro zone, Greece's defection would raise the specter of a cascading series of departures if other weak economies, also suffering in the debt crisis, chose to follow Athens's example. To sum up, it could get ugly.

But there is another, less terrifying scenario. By leaving the euro, Greece would lose its bailout money – but it would also regain control over its economic future. By returning to its own currency, Athens could depreciate its way to better competitiveness, something the country simply can't do as part of the euro zone. Rather than suffering under German-imposed reforms and retrenchment, Greece could press forward with a drastic restructuring of its national debt, a step the leaders of the euro zone have been anxious to avoid. None of this means the process won't be painful – Greeks will have to endure years of austerity measures and reform whatever currency they use. But departing the euro zone might at the same time give the country a better shot at halting its economic free fall and returning to healthy growth, at least in a more reasonable period of time.

And the euro zone might gain from a Greek exit as well. Those tens of billions thrown at Greece in bailouts could then be redirected to recapitalize banks, shore up Italy and Spain and protect the core of the monetary union. How would global financial markets react? Hard to predict. The exodus of a country from the euro zone would be unprecedented and destabilizing. But then again, Greece's exit would not be surprising to anyone who hasn't been stranded on a South Pacific isle for the past two years. That suggests the impact might not be as dramatic as many fear, especially if Europe acts fast to back up its banks and defend the remaining euro zone member states.

In many ways, Greece is like a contestant on the old game show Let's Make a Deal. The country has a choice of two doors – one that leads it out of the euro and on its own; one that keeps it a part of Europe and its great experiment in integration. We can only guess what is behind those doors, and there is no way of knowing for certain which door is best to open. Greece could end up with a shiny new Cadillac. Or a year's supply of canned tuna. It's not a choice I'd want to make. I wish them luck.

blog comments powered by

Biggest Strike Yet Brings Greece to a Standstill

Protesters throw fire bombs at riot police as they demonstrate in front of the Greek parliament in Athens on October 19, 2011.

Angelos Tzortzinis / AFP / Getty Images

The 48-hour walkout by Greek workers on Wednesday and Thursday has been dubbed "the mother of all strikes" by leading Greek daily Ta Nea. The biggest strikes since the debt crisis began in the country almost two years ago saw tens of thousands of protesters ringing parliament on Wednesday as part of massive demonstrations against the latest raft of austerity measures — measures that parliament is expected to pass into law on Thursday. The Greek parliament approved the measures in principle on Wednesday despite the protests outside.

By late afternoon, the largely peaceful rally had devolved into street fights between riot police and hooded youths. One demonstrator, Evangelia Trifona, sat on the steps of a store with smashed windows, her eyes red and watery from tear gas. (See TIME's photo-essay "Protesters Bring Athens to a Halt.")

Trifona, a 59-year-old housewife, started venturing to demonstrations a couple of months ago, after she stopped believing that the austerity measures were going to led anywhere good. A few months ago, her husband, a retired schoolteacher, saw his pension cut by a third. Then the restaurant they ran in Crete failed. Now they can no longer pay their mortgage. She's afraid she and her husband are going to be homeless.

"I'm coming back tomorrow," she said, coughing into a handkerchief. "I want someone to hear me, to know I exist. I feel like no one in parliament is listening to me or cares about me." (See TIME's photo-essay "Outrage in Athens.")

The strikes shuttered government offices, public services, shops and even bakeries. Taxi drivers walked off the job, as did air-traffic controllers (though they shortened their work stoppage from 48 hours to 12). Hundreds of riot police have cordoned off the area around parliament, the target of Greeks' anger over new measures that include further salary and job cuts in the public sector, a controversial new property tax, and slashes to pensions.

The European Union, the International Monetary Fund and the European Central Bank — a group which Greeks call the "troika" — say Greece must adopt even harsher austerity measures to keep receiving billions in international bailout loans. Without those loans, the country would not be able to pay its bills and would default on its massive sovereign debt, which is now 162% of gross domestic product. Euro-zone leaders are set to discuss the debt crisis at a summit on Oct. 23. They are maneuvering to set up a rescue agreement that will find new ways to reduce Greek debt, protect banks exposed to economically troubled euro-zone countries, and include a rescue fund to keep the crisis from spreading.

But the issue of how to handle the Greek crisis continues to vex euro-zone leaders. Some economists say the medicine of austerity is actually killing the patient by stalling Greece's weak economy. The country's deep recession is in its third year, and the official unemployment rate rose to 16.5% this summer, one of the highest on record for Greece.

Personal bankruptcies are also on the rise as people struggle to pay bills and mortgages on reduced salaries and pensions. Many Greeks say they're so squeezed they won't be able pay the new property tax demanded by lenders. "Nearly all of our neighbors are having the same problem," says Roula Korobili, a retired secretary whose family of four survives on her $1,000 monthly pension. "We're just ready to throw up our hands."

But the most politically sensitive item in the new austerity package is a provision that would reduce the power of collective bargaining in some sectors, including banking, journalism and manufacturing. Unions strongly oppose the measure. They say it's bad for workers and is the first step towards dismantling the national minimum wage, which, at around €740 ($1,000) net pay, is higher than in most European countries — Spain's is €641.50 ($880), while Portugal's is €485 ($670).

Louka Katseli, who was ousted as Labor Minister this summer but is still in parliament, was planning to vote against the provision. Finance Minister Evangelos Venizelos says it must pass because international lenders have demanded that Greece make its labor market more flexible. (See more on the Greek Meltdown: Putting the Hell in Hellas.)

The schism over collective bargaining isn't just about the working class and the minimum wage. It's also about the power of Greece's labor unions, which have been part of the country's political machinery for years. Platon Tinios, a professor of economics at the University of Piraeus, says labor unions "as they currently exist in Greece have hurt, not helped the country." They hang on to bureaucracy that strangles the country but benefits them, he says.

"This particular legislation is actually moving away from centralization," adds Tinios. "And I think this is what the unions are particularly worried about. They might lose control. They're afraid things will be happening further away from their reach."

Unions have in the past been especially supportive of the ruling center-left PASOK party, which is now trailing the main opposition, center-right New Democracy party in public opinion polls. Union leaders now deride PASOK as traitors, while Finance Minister Venizelos likened the chronic strikes to "blackmail" at a critical time for Greece.

A two-week strike by sanitation workers has left the streets of Athens piled high with trash. The capital's exasperated mayor, George Kaminis, is trying to hire private workers to pick up the rotting garbage after the Hellenic Center for Disease Control and Prevention warned that it would turn into a public-health hazard. Sanitation worker unions have threatened violence if private contractors come in. Kaminis is now appealing to the army for help. (See if the Greek cuts have gone too far.)

Meanwhile, Prime Minister George Papandreou has appealed for unity on the crisis. "We must persevere in this war as people, as a government, as a parliamentary group in order for the country to win it," he told his cabinet on Tuesday.

But as she joined in the protests on Wednesday, housewife Evangelia Trifona saw no victory for Greece in this war. She shook her head as she watched riot police and angry demonstrators fight on a street where she once took her daughter for shopping and souvlaki. The crowed yelled at the police, who doused them with tear gas again. Trifona covered her face with the sleeve of her cardigan. "Shame on you," she coughed at a young officer. "We're running out of hope. Can't you see?"

Read "Greeks Take to the Streets Against More Cuts."

See why the euro isn't fixed yet.