Following the announcement that the Greek prime minister would seek the opinion of his people by calling a referendum on the second European Union bailout, I have lost much of my optimism about the ability of the Eurozone to stay united for long. This is the case I make this morning in the New York Times’ Room for Debate series.
To be honest, I was never really optimistic about the European Union. I thought lifting trade barriers and opening borders were great ideas but that the top-down creation of a common currency made no sense. More recently, I didn’t believe that the recently agreed-upon E.U. bailout package would actually save the euro. For one thing it seems that Greece’s problems — as well as Portugal’s and now Italy’s — are beyond bailout reach.
By all accounts, if given the choice between more austerity measures and a bailout versus rolling the dice on a potential default, the people of Greece are likely to reject the EU package. That probably means default and a more or less disordered exit of Greece from the Euro. So what does it mean for the EU? No one can be sure, of course, but here are two scenarios:
Under one scenario, leaving the euro proactively could alleviate the pressure and, as Cowen says, allow Greece to start “the process of Greek bank recapitalization, long and painful though it might be.”
Of course, there is a slight chance that a transparent Greek default and euro exit (followed by Portugal?) may help preserve the monetary union for those countries that remain in it. Months of market turmoil would follow but in the end Europe could stand on firmer ground.
Unfortunately, this is unlikely. Today, Greece is still borrowing money to pay for its daily consumption; a default would mean even more austerity measures, which could lead to severe social unrest, if not worse. And then we have Italy. No reason to be optimistic there (120 percent debt-to-G.D.P. ratio and a 10-year yield was up to 6.31 percent). The collapse of Greece followed by Italy could quickly bring the whole union down.
My piece is here and the debate is here.
Of course, I can see a scenario where Greece gets a better deal from EU leaders thanks to this referendum move. But I doubt a deal acceptable to all parties, including the private sector, that could fix Europe exists at this point. Do you?