As Greece heads towards new elections and a clear majority of the electorate is seemingly inclined to once again vote against the ‘troika’, a Greek exit from the eurozone looks an increasingly likely scenario. Should this majority materialise, political leaders in the eurozone will have to make a tough decision: either pushing for a Greek exit or attempting – against all the evidence – to sustain Greece in the eurozone while risking an even larger systemic crisis in the not too distant future.
To understand what is at stake, it is important to start by recognising that, at least in the Greek case, the bailout approach has clearly and disastrously failed. There are neither economic nor political and social conditions for enforcing the ‘troika’ agreements with Greece and recognition of that fact is a pre-condition for any sensible solution. In this context, throwing good money after bad money and negotiating new ‘austerity’ agreements does not seem a reasonable path forward. Once that is recognised, there are basically two options: establishing what would amount to a ‘transfer union’ in order to pay for the continuing Greek imbalances and financing needs or a Greek exit from the eurozone.
Political actors in Greece who favour a continued presence in the eurozone while opposing the ‘austerity’ measures are clearly betting in the first option, as are those outside Greece who would welcome the opportunity to achieve greater political centralisation in the EU as a consequence of the ongoing crisis. The push towards further centralisation and what would amount to a de facto unified eurozone economic and fiscal government is likely to meet fierce resistance from some key decision-makers and also – and more importantly – from electorates. But even if it did not raise grave political problems, the mutualisation of risk and the establishment of a permanent transfer union would greatly reduce any impulse for market-oriented structural reforms both at the national and at the EU level. In this setting, if external funds continue to be injected to maintain artificially liquidity in structurally insolvent states, the whole eurozone risks going bust.
It is true that a Greek exit from the euro may well endanger political stability and make reforms much tougher but the recent developments in the country show that staying in the euro has also not been conducive either to successful reforms or to a politically stable landscape.
As for the rest of the eurozone, the main choice on the table right now would thus appear to be between preparing the ground for an orderly (or as orderly as possible) Greek exit and persisting in a path that has so far proved unsuccessful and unsustainable both politically and economically. Because of the ill-thought-out bailouts and of ECB actions, a Greek exit will force the rest of the eurozone to take substantial losses and will also pose significant systemic risks for the euro. But the alternative to taking these losses now is to risk much bigger damage – and not only of a financial nature – later on. That is why an electoral victory by Syriza followed by a Greek exit from the euro is probably the least bad scenario under present conditions.