Quitting euro cannot save Greece
Luxembourg Finance Minister Luc Frieden recently said Greece must implement additional reforms or leave the euro. He is not alone among Europe’s prominent politicians and economists who defend the same idea. Naturally, their main concern is not saving Greece but the future of the eurozone. However, there are also some benevolent people who think that quitting the euro is the best solution for Greece’s serious economic problems. The majority of the desperate segment of the Greek people shares the same idea.
A short while ago, most of the Europeans got angry when some non-Europeans said quitting the euro was an alternative solution. (Naturally those people thought that a weak European economy would also harm the economies of surrounding countries, and even those countries much farther away.) It is interesting now to observe that the same Europeans have become more understanding, more tolerant toward foreigners’ (!) ideas.
Now, in other eurozone countries which face similar economic problems, even some wise people have also begun to discuss the probable advantages of quitting the euro. These countries which have enormous deficits and debt problems might think that after abandoning the euro and returning to use their former national currency or introducing a new one, they can bring a solution to those problems with the help of a sharp devaluation. Or other countries, such as Germany, which do not have similar economic problems and are fed up dealing with the problems of the weak eurozone economies, might think that quitting the euro is better for those countries and also for themselves.
It is not so easy. First of all, one must recall the serious social and political difficulties and the enormous financial cost of introducing the euro years ago. Secondly, when a country converts to its former currency or introduces a new one, an inevitable devaluation will not help to restore macroeconomic balances, but will deteriorate them.
On the other hand, mainly because of the same problems, when a country with a weak economy quits the euro and returns to its former currency or introduces a new one, it will be forced to implement some controls on capital movements, banks, financial markets, etc., in order to stop the inevitable rapid capital outflow. This will close domestic financial markets to international ones and create additional difficulties to obtain foreign financial support which is still necessary to solve the debt and deficit problems.
Frieden said that if a member state of the eurozone ‘’prefers not to take money from other states and return to its national currency without structural reforms, then that state has chosen to exclude itself.” He also added, ‘’It was the responsibility of the Greek people to choose whether they want to stay in the eurozone.’’ It is a very naive and even a childish comment on a very grave situation. First of all, he does not have a definite idea about the responsibility of the final decision. In other words, who will decide to stay in the eurozone or to quit? The government or the people? (The minister must know the difference between the two concepts.) The answer to this question is the core of the matter.
It is obvious that the euro created a lot of problems from the beginning and is losing ground now in some countries as it is regarded as one of the main reasons for the economic troubles. However, it is also obvious that the problem is not the euro itself but the discrepancies in the national economic policies among the eurozone countries. Politically, it was impossible to impose a common policy package on all member countries. Even if they agreed to implement that package, the emergence of different economic problems in different member countries would have soon obstructed full implementation.
It’s not just the economic problems of individual countries that are so different from each other that it is unrealistic to expect that national governments must obey all international rules, but political and social problems as well. Also, it is not rational to pin the blame on individual national governments or on the people of those countries. The hastily and prematurely designed monetary system was wrong from the beginning and it is too late to try to save a national economy by forcing it to leave that monetary system. This is the case in Greece.