The Case for Letting Greece Go

The risk now is political contagion from rewarding non-reform.

The Wall Street Journal

April 8, 2015 7:31 p.m. ET

"...What’s not sustainable is allowing euro members to bully their way into deals in which they reap the rewards of a currency union without living by its rules...."

Thursday marks another deadline in Greece’s struggle to avoid default, as a €450 million payment to the International Monetary Fund comes due. Athens says it will meet this obligation, but sooner or later Prime Minister Alexis Tsipras and his government will miss a payment to someone if it doesn’t agree with creditors on a new bailout. An exit from the euro would then be a real possibility.

No one should cheer a Greek exit, which would be a disaster for the Greeks. But if Athens won’t implement reforms that would return Greece to growth and sustainable finances, allowing the country to leave would be the least bad outcome.

Unlike the crises of 2010 and 2012, Greece’s current threat to the eurozone isn’t financial contagion. More than 80% of Greece’s sovereign debt is now held by governments or official creditors, including the IMF, other eurozone governments and the European Central Bank. They can absorb default-related losses.

As of last September the exposure of private eurozone banks to Greek debt was less than €17 billion ($18.36 billion), one-third of the level in 2012 before Greece’s second bailout. The amount is probably lower now and much of this debt is short-term and speculative, according to Fitch Ratings.

A Greek exit also won’t drag down other small eurozone economies. Spain, Ireland and Portugal have pressed forward with some supply-side reforms, and their bond yields have remained relatively stable and low since the latest Greece crisis began.

Greece’s main contagion threat now would be if it is bailed out again without reform. Athens wants creditors to reward Greek voters for electing a government committed to dismantling the reforms Greece needs. If creditors allow Athens to increase government spending while reversing labor-market liberalization and privatizations, they’ll encourage anti-reform movements elsewhere.

Spain’s left-wing Podemos party has polled well since Syriza’s Greek victory in January as Spaniards consider whether it might offer an alternative to painful reforms, and the party won 15 seats in the regional parliament in Andalusia last month.

Ireland’s Sinn Fein is gaining support for its anti-reform platform, and it invited a Syriza government minister, Euclid Tsakalotos, to its recent party conference. Italy has its own anti-reformers in the Northern League and the Five Star Movement.

Europe’s original bailouts were flawed. They were biased toward tax hikes to boost revenue, with too little thought for pro-growth reforms. A serious Greek government would offer to press ahead with privatization and deregulation in exchange for some leeway to cut tax rates along with government spending cuts. But Syriza has insisted on a return to something like the status quo ante, with higher spending, anti-growth tax policies and delays or halts in deregulation.

Accommodating Syriza’s agenda now would be a severe blow to a eurozone that urgently needs faster growth. Consider how hard it has been for France’s Socialist government to pass even a modest reform package that increases the number of Sundays that businesses can open to 12 from five a year.

The Alternative for Germany (AfD) party, founded in 2013, has also seen its support grow during this year’s Greek crisis as German taxpayers rebel against continuing to subsidize a recalcitrant Athens. Germans and other northern Europeans recognized the benefits of the common currency enough to extend a temporary hand to smaller countries during the crisis in exchange for reforms. They’re less likely to support a currency bloc that looks like a blank check.

The strongest argument against allowing Greece to leave the euro is that it would dent the bloc’s appearance of permanence, making the euro more like a currency peg that members could leave at will. But we doubt other countries will want to follow Greece’s example once they see the damage to Greeks.

They might even take the warning as incentive to do more to fix their economies. What’s not sustainable is allowing euro members to bully their way into deals in which they reap the rewards of a currency union without living by its rules.

http://www.wsj.com/articles/the-case-for-letting-greece-go-1428535900