When the people of Greece go to the polls on Sunday to decide on their economic future, they’re going to face a really difficult choice. They’re being asked to decide whether to accept European demands for further austerity. If they reject those demands, they’re likely to be forced out of the euro altogether.
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We’re torn on how Greeks should vote, because all of their options are bad. Either option is likely to lead to more economic pain, and there’s a lot of uncertainty about the long-term results of either decision.
But we thought it would be interesting to write what we felt were the strongest arguments on each side. Matt Yglesias wrote his strongest case for a “yes” vote, while Tim Lee wrote the case for voting no. But neither one of us is sure that we picked the right side.
The best argument for Greeks to vote “no” on Sunday is simple: the euro is a disaster. And voting no is the quickest way for the Greeks to get out of it.
The euro is a kind of macroeconomic straitjacket. Central banks are supposed to print more money when the economy is in a recession, and print less money when the economy is booming. But the European Central Bank is responsible for the health of 19 different economies, and at any particular point in time they will have wildly different needs.
Right now, Greece is suffering from 25 percent unemployment, while Germany is enjoying 5 percent unemployment. Greece needs more monetary stimulus; in Germany, more stimulus would only create inflation. There’s no way for the ECB to craft a monetary policy that will serve both countries well.
This isn’t a problem that’s going to go away. Europe will have more economic downturns in the coming decades. And each time this happens, the economic straitjacket of the euro will make it harder for some of Europe’s economies to recover as quickly as they could. And as one of the poorest and most isolated of the European economies, Greece is among the most vulnerable.
A successful euro would require political union, and that’s unlikely
European elites were aware of this problem when they created the euro, and they had a plan for solving it, under the slogan “ever closer union.” The idea was to gradually make Europe more like the United Staes. In the US, we also have a single central bank setting monetary policy for 50 state economies. The difference is that America has a much more integrated economy. Much of the tax collection and government spending in the United States happens at the federal level. People regularly move from one state to another in search of work. The the huge economic disparities we see between Germany and Greece today don’t tend to exist among American states.
The problem is that this kind of integrated economic system ultimately requires an integrated political system. Americans see themselves as Americans first and Floridians or Oregonians second. People in wealthy Connecticut don’t get too outraged that their tax dollars are subsidizing people in West Virginia.
That’s not how things work in Europe. Germans and Austrians have no interest in paying for welfare benefits for people in Greece and Spain. For that matter, people in Greece and Spain don’t particularly want to give up sovereignty to the European Parliament. A European superstate isn’t going to happen any time soon.
Leaving the euro would be painful but temporary
Matt is right that European elites have an incentive to make a Greek exit as painful as possible for Greece. But Europe can only inflict so much pain on the Greeks as they exit the euro club. Greece is still a sovereign nation, and there are many countries it can trade with outside the European block. Moreover, Europe will have both geostrategic and humanitarian incentives not to push Europe too far.
But the larger point here is that the worst effects of a euro exit would be be over fairly quickly — probably within a year or two. After that, the Greek economy could enjoy significant upsides. With its own currency, it would have a lot more leverage to renegotiate its debt burden. And with its own central bank, Greece would be able to pursue a monetary policy that’s more appropriate for the highly depressed state of the Greek economy.
Leaving the euro is hardly a panacea. There’s a risk that leaving the euro would produce a severe and protracted panic that’s even worse for ordinary Greeks than the endless 25 percent unemployment they’re suffering from now. Greece will have to pay higher interest rates for decades after leaving the Eurozone, and it will have to work hard to convince foreigners to take its currency seriously. But in the long run, Greece’s future outside the Eurozone is likely to be better than its future inside of it.
