Manage this.

Photographer: Chris Ratcliffe/Bloomberg

Help Greece Leave the Euro

Eric Beinhocker is executive director at the Institute for New Economic Thinking, University of Oxford.
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The Greek people have voted "no," rejecting further austerity in exchange for another bailout. But the real answer to Greece’s problems was not on Sunday's ballot. 

Voters were offered a Hobson’s choice between a miserable existence as a vassal state in permanent depression and a possible chaotic exit from the euro. If Greek and European leaders want to give the country hope for the future and restore unity to the region, they should lay out a plan to help Greece leave the euro, yet remain firmly in the European Union.

QuickTake Greece's Fiscal Odyssey

Let's step back and look at the big picture. Greece needs a way to restore growth to its economy, regain sovereignty and dignity for its people, and responsibly pay off the portion of its debts that it can reasonably bear. Realistically, it will probably never reach German levels of development and fiscal prudence. It struggles with enormous inefficiencies, corruption, capture by special interests and incompetent governance -- as many countries do. What makes Greece so problematic is that it joined a currency union with some of the most advanced and competitive countries in the world.

One of the great lessons of many failed and a few successful efforts at economic reform over the past century is that countries don’t leap up the development ladder. With painstaking work over generations, Greece can become a better Greece. But that process must be led by Greeks. No amount of reform forced by creditors or austerity will make it happen. As the long history of gold standards, dollar pegs, various exchange-rate mechanisms and now the euro has demonstrated, countries with wildly different levels of competitiveness and development cannot be shackled together with the same currency without repeated crises and eventual dissolution.

So Greece must eventually leave the euro. The choice is a chaotic exit with much suffering for the Greeks, huge defaults on European debts, and a possible shift of Greece away from Europe toward Russia -- or a managed exit with assistance. So how would a managed exit work?

Various plans have been put forward and all involve capital controls (which Greece currently has), a conversion of bank deposits to devalued drachma (Greeks will likely suffer deposit losses anyway to recapitalize their banks), and a primary budget surplus (which the creditors are demanding anyway). Thus, a managed exit need not look much worse than the current situation, with one big exception -- Greece would lose access to external capital markets.

This is where Europe can help. To exit without total collapse and return to growth, Greece will need new loans, debt relief and development assistance. Again, this doesn't differ much from what Greece has been getting, except that the country will need genuine and significant debt write-offs (instead of restructured interest payments) to stabilize a new drachma economy and allow it to eventually lure back private creditors. Germany and the rest of the EU might be more willing to do this if they see a true end to the crisis -- a certainty that currency independence for Greece could provide.

Some argue that a managed exit from the euro is impossible: None of the EU's treaties allows for such a possibility, and doing so could cast doubt on the membership of other financially challenged countries. Yet throughout the crisis, Europe's leaders have invented new mechanisms and institutions (such as the European Stability Mechanism and the banking union). Surely they can do the same for a Greek exit. Meanwhile, other countries such as Portugal and Ireland have stabilized and at the moment appear unlikely to go the way of Greece. Even if some countries diverged significantly from the rest of the euro area over the coming decades, one or two more managed exits wouldn't necessarily be such a bad thing. It would arguably be preferable to permanent crisis or a complete crackup, which are the risks Europe faces now.

A managed exit need not and should not mean an exit from the EU. The EU is capable of containing widely divergent economies even if the euro area is not.  And a generous pledge of assistance to manage the transition would rebuild trust and help both Greeks and other Europeans see that Greece’s future still lies in Europe.

Above all, Europe needs to end its state of chronic crisis. The Greek situation has drained both Europe's coffers and its geopolitical power. Angela Merkel has noted that she has a few other items in her in-tray. The world needs Europe’s engagement on issues including economic growth, immigration, Russia’s aggression, a Middle East on fire and climate change. Helping Greece exit the euro, while fully embracing and supporting it as a valued member of the EU, would restore hope and return Europe to its proper role as a force for good in the world.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Eric Beinhocker at info@inet.ox.ac.uk

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net