European Future Forget Grexit

Stop all this talk of dumping the euro, writes the president of the Kiel Institute for the World Economy. Instead, figure out how to put Greece back on firm financial footing.
Talk of Greece ditching the euro is unhelpful.


Greece has held its elections, and things are not as bad as forecasters predicted. The leftist Syriza coalition emerged victorious on its anti-austerity platform and Western civilization has not collapsed.

The election results demonstrate, however, that the euro zone needs new mechanisms to survive over the long term.

Early elections are actually not uncommon in the parliamentary process. In Germany, they last occurred in 2005. But when the Greeks vote, alarm bells go off. The wrong party just might win.

Now that has happened and the "wrong party" Syriza has won, some financial policy hardliners are demanding that Greece exit the euro zone. Commentators have even come up with a term for the scenario – “Grexit” – though it is utterly unrealistic.

To abandon the euro, Greece would have to first leave the European Union – a long political process that would be bad for everybody, neither Greece nor other euro countries would benefit from that. It would set a precedent for Europe, in which more highly indebted countries could again be caught in a downward spiral.

For the Greeks, the devaluation of their new currency after leaving the euro would bring even more uncertainty and massive price increases. This would also affect capital assets, which are necessary to restructure economies. For good reasons, even Syriza itself has never called for leaving the euro zone.

The E.U. would have to stabilize the Greek banking system in order to minimize the danger of financial infection.

So stop all this talk of a Grexit and start thinking about how to put Greece on solid financial footing again. The country needs a credible fiscal plan that specifies a debt quota of 60 percent of gross domestic product – and determines how anti-cyclical the fiscal policy is allowed to be until this goal is reached.

A grievous problem of the current euro rescue policy is that the so-called troika of emergency lenders – the European Commission, European Central Bank and International Monetary Fund – requires massive austerity programs from indebted countries. That exacerbated problems. Greece, for example, was mired in recession for six long years. Only in 2014 did it achieve minimal growth of 0.6 percent.

With the help of an expansive monetary policy, it is possible to stimulate an economy effectively in times of recession. There only needs to be a guarantee in return – that during boom times savings are achieved and debts are liquidated. Greek adherence to such a plan could be monitored by the troika or by the European Commission alone.

In order to set up a fiscal policy, Greece would first have to be relieved of part of its debts, to some extent by privatizing state property. Moreover, a debt-restructuring haircut would most likely be required. It could be linked to a new policy that stimulates Greek growth by promoting competition and investments in human capital and — where clearly required — physical capital.

In economic terms, it doesn’t matter whether debts disappear by renouncing the demand for repayment or by extending the life of loans.

In addition, a fiscal plan would have to be implemented with automatic changes in taxes or state spending, to ensure that debt reduction over the mid-term would not be jeopardized with each change of government.

At the same time, the E.U. would have to stabilize the Greek banking system in order to minimize the danger of financial infection spreading inside and outside of Greece.

A consolidated European banking union would be an important step in this direction. It could guard against the failure of financial institutions deemed “too big to fail,” and ensure that smaller banks could be wound down if necessary without infecting others.

So just as it makes sense for an independent central bank to control inflation, it is also reasonable to use a fiscal plan to guarantee that state debts cannot rise uncontrollably. This would make sense in other euro countries as well. Instead of imagining exit scenarios, the debate should concentrate on these issues.


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