Why abandoning the euro would mean even more Greek austerity


Madeline Wilson from the National Gallery of Victoria mimics the scream from Edvard Munch's famous hand-coloured lithograph version of 'The Scream.'


William West

In today's Wall Street Journal, journalist Charles Forelle has an excellent analysis of the grim options facing the euro zone and Greece, since Sunday's elections piled political crisis on top of its debt crisis.

Forelle explains why monetary divorce, which looks increasingly likely, would be terribly messy for both sides. He foresees not only investors but also foreign businesses fleeing Europe's periphery if they fear that contracts would be fulfilled in devalued local currencies rather than euros. In other words, a Greek withdrawal could trigger not just the kind of financial panic that we saw in 2008-2009, but a broader systemic panic. He also cites sources who argue that markets have not yet priced in the gravity of the dilemma. 

Still, if the ragbag of leaders that Greece elected rushes to jilt the troika, abandon austerity and flee the euro zone, Forelle points out that this course of action is hardly going to endear them with voters in the short term:

"[L]eaving the euro is hard for Greece to do. Even if it stopped repaying all of its debt, the government would still spend more than it takes in. The bailout money is now the only thing plugging that gap; without the bailout, Greece would have no choice but to suffer more of the painful cuts Greeks are rebelling against.

If the prospect of further budget cuts causes politicians to reconsider, then another key predicament may prompt Greece's paymasters to keep indulging its unruly debtor: They have a lot to lose if they don't.

"[T]he bailout has left the governments of Europe, the European Central Bank and the International Monetary Fund as Greece's chief creditors. Letting Greece go would surely mean losses for some of them."

Seems like yet another classic case of: You will and you won't, you can and you can't, you're damned if you do, and you're damned if you don't.

The Greek drama continues.