Greece Is Stuck With the Euro, and Vice Versa

How can you mend a broken union?

Photographer: Louisa Gouliamaki/AFP/Getty Images

Sometimes a country becomes so overridden by debt that it actually makes sense for it to default, abandon its currency and start over. Greece is not one of those countries.

That hasn't stopped a number of economists from arguing otherwise, however, and Prime Minister Alexis Tsipras's statement that he may call a referendum on any deal with creditors suggests Greeks might soon be asked to make a choice. If they are, they should trust their instincts (insofar as they can be measured by opinion polls) and stick with the euro.

QuickTake Greece's Fiscal Odyssey

It isn't that default or leaving a currency union is unthinkable. Far from it: The Hellenic peninsula was home to the first recorded default in the fourth century B.C., and modern Greece has reneged on its debts four times since gaining independence in 1829. Worldwide, more than 70 countries have exited currency unions and pegs since 1945, not all of them painfully.

The argument for Greece to go it alone has always been superficially attractive. For one thing, it should never have joined the euro in the first place, because it couldn't meet the European Union's debt-limit requirements. And the standard way for overextended countries to reboot their economies is to devalue their currencies, increase their exports and start growing again. So long as it's in the euro zone, Greece can't do this.

The likely outcome of a return to the drachma would be more misery for Greece. While some defaults lead to recovery, often after a short period of pain, others haven't been successful or quick. In Greece, the combination of poor governance and a falling currency has tended to produce inflation rather than sustainable growth. There's little reason to believe this has changed.

Greece still has a relatively small tradable sector to create export-led growth -- mainly tourism, shipping and agriculture. So the potential benefits of a devalued currency are limited. Greece needs a new business model.

Another hurdle to a successful devaluation is that the country has already undergone so much economic depression. One projection says that a default and return to the drachma would lead to only a 10 percent loss of gross domestic product. That sounds manageable -- until you realize that Greece has already lost more than a quarter of its economy since the start of the current crisis. Another 10 percent could bring about a political and economic meltdown.

Which leads directly to a further handicap: the Greek government. Changing currencies is no small matter. It requires organization on a military scale, from both elected officials and civil servants. Neither group, to put it kindly, has shown that degree of competence. A lasting recovery would require precisely the kind of fiscal discipline and structural reforms that Tsipras is resisting.

Leaving the euro could also have unpredictable consequences for Greeks' place in the European Union, especially if it results in other defaults and departures. Greece, Europe's southeastern outpost, needs the security of the EU more than the EU needs Greece.

With another government, at a calmer time, it might make sense for Greece to leave the euro. Right now, however, it's more likely to lead to even deeper misery.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.