A Greek exit from the euro area would inflict heavy
damage in Greece and throughout Europe. It could also be one of the best things
that ever happened to the currency union.
Greece’s repeat parliamentary election next month will
serve as a referendum on whether the country should end its 12- year membership
in the common currency. An affirmative answer would trigger a cardiac arrest of
the Greek economy, as the banking system collapsed and foreign suppliers
refused payment in drachmas. The financial system of the euro area, by far
Greece’s biggest international creditor, would suffer hundreds of billions of
euros in losses.
For the European economy as a whole, the primary danger would be the reintroduction of currency risk into what has been billed as an irrevocable monetary union. When Greek banks collapse, or have to be closed for a prolonged holiday to facilitate a forced conversion of deposits into new drachmas, one cannot predict whether citizens and firms across the periphery of Europe will pull their money out of their banks just in case. The result could be financially disastrous.
The potentially dire repercussions have led many to
assume that no responsible European policy maker would allow a Greek exit to
take place. By this view, all the talk about letting Greece leave is merely a
scare tactic. Europe’s leaders will blink first in their game of chicken with Greece and ease
the terms of the country’s austerity program.
Moral Hazard
This logic underestimates a crucial element of the
euro area’s political economy: In a union of partially sovereign members
without a supranational authority, concerns about moral hazard -- the
possibility that lenience toward Greece will encourage other countries to
misbehave -- still carry a lot of weight. Euro-area leaders are not bluffing
when they threaten to cut offsupport
from the European Central Bank and let the Greek government run out of money, leaving it to decide
whether to dump the euro or remain as merely a euro-ized country such as
Montenegro.
What Europe’s leaders will not countenance is a
breakup of the euro. Therein lies the silver lining of a Greek exit. To protect
the currency union from the fallout, the remaining members will have to move
very quickly toward the economic and financial integration that has always been
necessary for the euro’s long-term survival.
Such is the nature of the European Union and the
history of regional integration: It is propelled by bouts of acute crisis.
Make-or-break moments are what shape the boundaries of the politically possible
and inspire leaders to do whatever it takes to save the euro.
Consider, for example, how Europe might respond to the
threat of bank runs. Only some kind of pan-euro deposit- guarantee program
would be authoritative enough to persuade people to keep their money in the
banks of peripheral countries such as Portugal, Spain and Italy. Initially, German Chancellor Angela Merkel and ECB President Mario Draghi could make the commitment orally. Putting the
program in place, though, would require a quantum leap in the integration of
euro-area banking supervision and regulation. Control over banks in the area
would have to be transferred to the supranational level. In other words, a
euro-area banking union could emerge as the direct result of a Greek exit.
Consolidating Effect
The catastrophic economic repercussions in Greece --
which would be very visible for electorates in other countries -- would have a
consolidating effect on the euro area. It would demonstrate the limits of
bailouts and the consequences of irresponsible behavior, alleviating the risk
of moral hazard in the remaining member states. No peripheral electorates would
want to emulate Greece’s experiences. Northern taxpayers would be satisfied that their financial
support was neither unlimited nor unconditional. As a result, the thorny
politics of fiscal- integration projects, such as the introduction of euro-area
bonds, would become much easier to handle.
Beyond that, losing Greece would relieve one of the
euro area’s biggest problems: Its member economies have been too out of sync to
share a common monetary policy. The departure of the most economically and
politically challenged member would allow the remaining 16 members to act much
more like a unit.
Ultimately, only deeper integration among the
remaining euro-area members could re-establish the notion that the currency
union was irrevocable after a Greek exit. Fortunately, that’s precisely the
response Greece’s departure would be most likely to produce.
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