Grexit would strengthen, not weaken, the eurozone
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Version 0 of 1. With a final decision about Greece’s future in the eurozone expected on Sunday, the crucial question in the mind of European leaders will be what a deal would mean for the short- and long-term sustainability of eurozone and European integration. Since coming into office, the Athens government has relentlessly argued that Greek expulsion would inevitably trigger an unravelling of the monetary union, and ultimately deal a fatal blow to the European project itself. Until recently this narrative had gained little traction, but as Grexit becomes the default scenario and media coverage more frantic, more commentators warn of a potential “Lehman moment” for the EU. They fear that Grexit would undermine public trust in the core values of the EU and turn the eurozone into a currency-peg arrangement, which will be unpicked by financial markets or populist political leaders seeking an easy way out. Even the German weekly Der Spiegel showed Merkel sitting on ancient Greek ruins, under the headline: “If the euro fails, so does Merkel’s chancellorship”. It may be true that Grexit would be an unprecedented event in the history of European integration and raise a host of difficult legal questions. But the fears for the political sustainability of the euro are vastly overblown. In the short term Grexit would pose no existential threat to the eurozone, especially if it is done in a coordinated fashion. Five years ago the risk of contagion from a Greek default and exit were real. Monetary union remained fragile, with a growing and high divergence in the borrowing costs between the core and periphery countries as investors fled for safety. But this time the markets’ reaction to last weekend’s referendum result has been muted, with the borrowing costs of Italy and Spain rising relatively little from low levels. The economies of Ireland, Spain and Portugal are in a much better shape as a result of structural reforms and fiscal consolidation. Related: Alexis Tsipras: Greece used as 'austerity laboratory' – live updates Moreover, the European Central Bank has become de facto lender of last resort with its OMT – outright monetary transactions – programme, flanked by new institutions and mechanisms such as the European stability mechanism and the banking union. The majority of Greek debts are held by public institutions, and the size and location of the potential losses are much clearer. The second reason lies in the need for trust. Economists have torn out their hair over why the creditors have not been able to reach a deal, given the alleged failure of the programme, the certain financial losses to creditors, and the small differences in fiscal terms. What they failed to appreciate is that the governance of the eurozone, as indeed of European integration more broadly, is not a succession of single bargains but a compromise-making machine held together by law, informal rules and trust among democratically elected participants. A “bad deal” that breaks the underlying macroeconomic principles of the adjustment programmes for Ireland, Spain and Portugal could trigger demands for renegotiation. After initially accepting the conditions on 20 February, the Greek government subsequently made it clear that it rejects both the formal and informal rules at the heart of the eurozone. A deal that appears to reward the abrasive negotiation tactics of the Syriza-led government could undermine the informal rules and trust that hold both the eurozone and the EU together. Grexit would increase the chances of further eurozone deepening through stronger institutions and fiscal policy Third, Grexit would increase the chances of further eurozone deepening through stronger institutions and fiscal policy, necessary to make monetary union sustainable in the long run. Before this happens many eurozone governments, including Germany, will need to spell out the full implications of economic and monetary union membership to their citizens and make an enlightened case for greater fiscal solidarity and deeper integration. However, making this case will be easier when the representatives of the recipient states don’t accuse those who provide bailouts and debt relief of “fiscal waterboarding” or financial “terrorism”. Finally, Grexit would make it more likely that the eurozone will adopt a mechanism for planned exit from the euro. Plans for this have already been drawn up in Brussels and some national capitals to forestall any future danger of countries blackmailing their partners with the threat of irregular exit. Instead of engineering an exit through the back door of a misleading referendum question, governments that feel their electoral mandates are incompatible with eurozone membership can ask their populations in a transparent and informed way about leaving. No doubt such a decision would not be taken lightly, given the experience of Greece and the costs of doing so, but neither the euro nor EU membership is legally irreversible for sovereign states – and ultimately they depend on sustained political support among the public. Differentiated integration will have to be the answer to these challenges, rather than one size fits all. In the past the EU has been guilty of making fairweather assumptions about internal as well as external challenges. Grexit would crystallise the need to strengthen the core to withstand such challenges, while creating more flexible and democratic arrangements for those unwilling or unable to take on the responsibilities this entails. |