August 11, 2011

Should Greece Exit the Euro?

After the American Century

Some time ago in this space I suggested that giving money to the Greeks would not solve their problems, and that it was better to let them go bankrupt if they could not reform. Now leading German thinkers have reached the same conclusion, as reported today in the New York Times.  It took them a while, and the Germans pumped billions of dollars into Greece while thinking about it.  Now some are suggesting that perhaps Greece should exit the Euro, and in effect go through bankruptcy, and then come back in when its house is in order. There is no mechanism for throwing a country out of the EU, so this would have to be a "voluntary" departure.

It would have made far more sense to refuse a bail out in the early spring. To refuse now has a different meaning than it would have then. In August a refusal says not only that the Greeks must pay their own way, but that their problems are too big for the rest of the EU. Stopping all support for Greece now looks rather like a team of fire fighters leaving a blaze that is out of control because they cannot put it out. If the fire brigade is inadequate to save Greece, what good will it be when a larger economy such as Spain or Italy gets into trouble? The EU begins to look weak, and its currency unreliable. 

In short, once the EU has gone this far to save Greece, it rather must find a way to succeed. Recently, I suggested in jest that perhaps Greece could lease some of its islands to other countries for 99 years. This idea begins to look almost serious.