Amidst all the Greek turmoil, the phrase “between Scylla and Charybdis” – in Greek mythology, seafarers could avoid only one of the two monsters when passing through the Strait of Messina – has hardly occurred. Despite the obvious link to the subject matter, the phrase has thus far been unnecessary because Greece’s best choice was clear: to stay in the Eurozone. The cost of continued membership, however, is on the rise and it won’t be long until prolonged Eurozone status appears as bad as returning to the drachma.
On Tuesday, Eurozone finance ministers agreed on a second bailout package. Greece will introduce further austerity measures, in exchange for a €130bn bailout. The plan is to reduce Greece’s debt from 160% of GDP to roughly 120% of GDP by 2020.
The measures face severe criticism as austerity tackles the debt, but risks reducing GDP growth. Unless the austerity measures are effective, limited growth in GDP means Greece’s debt as a percentage of GDP may not fall as quickly as anticipated. The current package assumes the austerity measures will be effective, that GDP returns to 2.13% growth in 2014 yet still requires an additional €50 bailout ten years from now. Investors have voiced concern that a confidential IMF report reckons Greece’s debt might equal 160% of GDP in 2020 despite all the austerity measures.
While the austerity measures’ effectiveness remains to be determined, its unpopularity is evident. The entire Greek crisis has been accompanied by unrest and rioting, and once the necessary austerity measures are in place – which has to happen before the end of February – more upheaval can be expected. This will only be exacerbated by the impression that the Greek government’s policy is dictated by the European Union.
While Scylla’s teeth –austerity, unrest, European diktat – have been bared for some time, little has been said about the perils of Charybdis. So far, leaving the Eurozone had not been considered realistic. This seems set to change. An article in last week’s issue of The Economist makes the case against leaving the Eurozone – which indicates that the option is now being seriously considered.
Leaving the Eurozone would be a mess, most of all. ‘Greek Euros’ would have to be distinguished from ‘real Euros’ as the former are converted into drachmae. Converting from the drachma to the Euro was tricky; doing the reverse will be more complicated still.
What is worse, though, is the effect on savings and loans. Because the drachma will definitely become worth less than the Euro, the value of savings will evaporate almost overnight while debtors will have to pay much less in real terms. Bank runs are a possibility if abandonment of the Euro looms large. Leaving the Euro can therefore cause enormous social unrest in Greece.
The consequences of leaving the Eurozone seem to display all the ingredients for anarchy, while the bailout package is at risk of only delaying this. Caught between Scylla and Charybdis, should Greece go through with the painful austerity measures, perhaps at the risk of making no progress, or should it leave the Eurozone now, regaining control over its policy?
To most technocrats, keeping Greece in the Euro appears the best option. But there are other reasons to support it. The most important reason is the solidarity the Eurozone countries are due to each other. Even if there are strong economic arguments to forcing or allowing Greece to leave, the Eurozone should continue to keep it in. The other countries let it in initially, and now have to protect the weaker member of the herd, not leave it behind to die. Likewise, the Greek government and the Greek people should do all they can to keep up. After all, they have been reaping the benefits of the Eurozone long enough to owe it to the rest.
This is not an encouragement to carry on with what has satirically been dubbed “the European experiment”, or a warning of the war that will inevitably break out on the continent if the Eurozone falls apart. Greece’s entry into the Eurozone was doubtless misguided, on both sides: Greece thought it could get away with faking the criteria, while overseers failed to find fault (or turned a blind eye to it, for political reasons). Both parties’ naivety is now being punished. Perhaps it even is naive to carry on trying to salvage what is left. But Greece and the other Euro countries have a duty to each other to stick it out. Entering the Eurozone was a mutual statement of trust, and this trust has to be honoured by both sides. Only when it becomes apparent that Greece cannot deliver its end of the bargain – e.g. if it fails to install the austerity measures – do the other Eurozone countries have a morally justifiable reason to leave Greece to its own devices.
(Article written for The Beaver, the LSE Student newspaper)