Should Greece give up the Euro? (photo: Will Spaetzel on Flickr)

It’s really not encouraging when you see a headline from the Guardian that the future of Greece, or any country for that matter, “rests on a phone call.”

Europe’s debt crisis has intensified after Greece’s embattled government said the country’s financial future would rest on a make-or-break conference call with EU and IMF officials on Monday.

Signalling that the 20-month saga had reached crunch point, Athens’ finance minister prepared the austerity-weary nation for further belt-tightening, saying the time had come for “decisive” action to avoid a Greek default.

“There is great volatility in the markets,” Evangelos Venizelos said after emerging from crisis cabinet talks. “If we want to avoid default, to stabilise the situation, to remain in the eurozone … we must take big strategic decisions.

Which begs the question of why Greece would want to remain in the eurozone, when the consequences of that decision would be so grave for its people. Greece “bit the bullet” with major structural austerity reforms just a couple months ago. Now they’re being told they have to do it all over again to receive the next $8 billion loan from Europe and the IMF. At what point do they just get off the carousel?

Nouriel Roubini thinks it’s time:

Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma. . . .

[cont’d]

It’s really not encouraging when you see a headline from the Guardian that the future of Greece, or any country for that matter, “rests on a phone call.”

Europe’s debt crisis has intensified after Greece’s embattled government said the country’s financial future would rest on a make-or-break conference call with EU and IMF officials on Monday.

Signalling that the 20-month saga had reached crunch point, Athens’ finance minister prepared the austerity-weary nation for further belt-tightening, saying the time had come for “decisive” action to avoid a Greek default.

“There is great volatility in the markets,” Evangelos Venizelos said after emerging from crisis cabinet talks. “If we want to avoid default, to stabilise the situation, to remain in the eurozone … we must take big strategic decisions.

Which begs the question of why Greece would want to remain in the eurozone, when the consequences of that decision would be so grave for its people. Greece “bit the bullet” with major structural austerity reforms just a couple months ago. Now they’re being told they have to do it all over again to receive the next $8 billion loan from Europe and the IMF. At what point do they just get off the carousel?

Nouriel Roubini thinks it’s time:

Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.

The recent debt exchange deal Europe offered Greece was a rip-off, providing much less debt relief than the country needed. If you pick apart the figures, and take into account the large sweeteners the plan gave to creditors, the true debt relief is actually close to zero. The country’s best current option would be to reject this agreement and, under threat of default, renegotiate a better one.

Yet even if Greece were soon to be given real and significant relief on its public debt, it cannot return to growth unless competitiveness is rapidly restored. And without a return to growth, its debts will stay unsustainable. Problematically, however, all of the options that might restore competitiveness require real currency depreciation.

This is the major point. Different countries in Europe have different problems that need to be solved by different monetary policies. Holding a common currency just wrings the life out of countries who need rapid depreciation, as long as Germany and the other large eurozone leaders refuse to depreciate the euro. This marriage cannot work. And the longer that Greece fails to force a reckoning, the bigger the pain for them and for the world, because the inevitable breakup will have a larger effect.

There’s a model here with Argentina and other emerging markets, who removed their pegs to larger currencies and eventually came out in better shape. Nobody’s saying this is a painless option, but none of them are. It would involve recapitalization of European banks and other serious interventions to limit the fallout. But the slow-motion path to depression we’re following right now is on net a worse alternative.

The recent experiences of Iceland, along with many emerging markets in the past 20 years, show that the orderly restructuring and reduction of foreign debts can restore debt sustainability, competitiveness and growth. Just as in these cases, the collateral damage to Greece of a euro exit will be significant, but it can be contained.

Like a broken marriage that requires a break-up, it is better to have rules that make separation less costly to both sides. Breaking up and divorcing is painful and costly, even when such rules exist. Make no mistake: an orderly euro exit will be hard. But watching the slow disorderly implosion of the Greek economy and society will be much worse.

Sadly, Greece looks to be headed in the other direction, scrambling to find the cuts demanded by their paymasters. They may lay off 100,000 public workers, in the midst of an economy already in depression. Someone can tell me how this makes more sense than walking away.

David Dayen

David Dayen