Editor's Note: Christopher Alessi is an associate staff writer at CFR.org. This is an Analysis Brief, reprinted with the permission of the Council on Foreign Relations. The views expressed in this article are solely those of Christopher Alessi.
By Christopher Alessi, CFR.org
For the first time in the two-year eurozone sovereign debt crisis, European Union leaders have openly acknowledged that Greece could exit the single-currency union, potentially plunging the global economy back into recession.
The shift followed a short-lived scheme (WSJ) by Greek Prime Minister George Papandreou to put a referendum to the Greek public over a new debt rescue plan agreed on by EU leaders last week. Papandreou abandoned the idea after his finance minister and other Socialist allies quickly turned against him on November 3. Meeting at the G20 leaders' summit in Cannes, German Chancellor Angela Merkel and French President Nicolas Sarkozy made clear that the preservation of the eurozone was a more urgent priority than rescuing Greece (Guardian).
In turn, Papandreou called on the Greek conservative opposition to join him in forming a national unity government that would support the implementation of harsh austerity measures mandated by last week's bailout plan. Papandreou, who faces a critical parliamentary vote of confidence (BBC) on Friday, has resisted calls for his resignation, saying such a move would lead to snap elections (DerSpiegel) that could usher in anti-euro momentum and prompt Greece's exit from the eurozone.
If Greece abandoned the euro, there would be significant knock-on effects for other indebted eurozone sovereigns and exposed European banks. In turn, there would be a ripple effect throughout the global financial system, including to U.S. lenders. Greece's exit could also force the collapse of the entire eurozone. "The failure of all the attempts thus far would create an existential threat to the common currency," Michael Huther, of the Cologne Institute for Economic Research, told Der Spiegel.
The political ramifications could also end up reshaping post-war Europe, writes Reuters' Noah Barkin. "Beyond the harrowing financial consequences, the move would also be a crushing symbolic setback for Europe," he says. "After more than half a century of closer integration, it would open the door to a new era of disintegration."
But some analysts argue that Papandreou actually succeeded in keeping Greece in the eurozone by having forced the conservative opposition's hand. Papandreou prompted the opposition party "to commit itself to being pro-euro," Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics, told CFR.org. By proposing the referendum, Papandreou was able to facilitate an expectedly forceful response from Merkel and Sarkozy. The prime minister made the opposition understand that EU support for Greece is not unlimited. In doing so, Papandreou has a "much firmer domestic political foundation" for implementing the necessary austerity measures, Kirkegaard says.
But other analysts question whether Greece would actually be better off if it were to leave the eurozone. TIME's Michael Schuman says that if Greece were to drop the euro it would regain control over its economic destiny. Moreover, Schuman argues, the eurozone could use the billions it was spending on Greece to shore up the continent's banks and build a substantive firewall to protect indebted Italy and Spain. The Economist rejects this argument, saying that gains in competitiveness would be minimal because of wage and price inflation: "Greek firms would be bankrupted by their euro debts."
The views expressed in this article are solely those of Christopher Alessi.
If the Greeks had any sense at all, they'd leave the EU, go back to using the Drachma and adopt some form of Maoism to replace their failed Capitalist economy. Greece is a very small country with few resources so these gigantic loans from both France and Germany cannot be paid back any time soon and only drag that country further into their depression!
Very well put, Onesmallvoice. Too bad that others here don't have the sense it takes to see things your way!
with all due respect to "one small voice " & Matt , going back to the drachma and adopting a Maoist economic model for Greece is completely ridiculous . Reverting back to the drachma would throw Greece
into a major economic depression . Adopting a Maoist economic policy is a quixotic absurdity and is not worthy of refutation. This problem has nothing to do with ideology – it is simple arithematic. out of control government spending for a country that has a very small tax base.
the underlying reasons for this socio-economic calamity are quite numerous , ranging from corruption to mismanagement.
what got Greece into this mess was the "welfare state mentality "that was the conventional wisdom since the end of the greek civil war coupled with the political gridlock. Greek politicians lacked the will to implement the necessary reforms . The public was also complicit in creating this mess – tax evasion in
|Greece became the national pastime .
However , I do not think we should underestimate the resolve of Greeks to implement the necessary reforms.
The silver-lining in this economic disaster is that the Greek public has put partisan politics aside and are united.
In ending , I wouldn't count Greece out as of yet.
As long as Greece can't ge back on its feet, it will always be a burden to the rest of the Eurozone. It's just a matter of time when the patience of the others will wear thin. Integration would onlymake sense if there are no huge disparities in mentality and work ethic.
Right. Greece would be a burden without being politically stable and financially able. This country has been in bad debts for nearly 200 years, and it's remarkable that it became a member of EU. From what I know from Greeks, their people are so used to the soft life and are rejecting any suggestion of higher taxes or working harder to help their country recover. Its in their nature and tradtion, so to speak.
Johnny you are so right. But how can you change a CULTURAL habit . Greece is part of history and their sucess has been attributed to their determination. Greeks are still in LALA land , how can you wake them up that the world is going under? and yet how can you reason with a mass of pensioners that it is up to them to save the country, and realy Can they save the country if they give up their pensions? Look for the others who got a peice of the cake. Mass confusion isn't it. Only prophecy can give the answer.
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