Last weekend’s vote in Greece against the terms of a bailout for its deeply troubled economy has launched a new flood of dire warnings about the future of Greece and the euro.
The conclusion, however, is likely to be much more mundane.
However, the problems of the eurozone – and of Greece in particular – have posed challenges like no other. The scenarios of catastrophe have ranged from worsening economic challenges for Greece, to a Greek exit from the eurozone, to the possible collapse of the EU itself.
But while these are the kinds of dramatic warnings that make for exciting headlines, the outcome of this crisis will likely to be less startling. Why? Because everyone has too much to lose from a sudden and badly organized “Grexit,” let alone from broader ongoing problems in the eurozone.
The benefits of the eurozone
The EU is, we should not forget, the wealthiest marketplace in the world. It has a bigger gross domestic product even than the United States; it is the biggest exporter and importer of services; it is the biggest source of – and target for – foreign direct investment, and it is the biggest source of foreign aid. Clearly, it is in everyone’s interests to make sure that the European experiment remains as healthy as possible.
To be sure, it is both worrying and galling that Greece should be the tail that is currently wagging the dog of the EU. This is a country of 11 million people that accounts for less than 3% of the economic production of the EU, a market of more than half a billion people. We have to ask how the Europeans ever allowed themselves to get into this fix, particularly given the many very bright minds that were brought to bear on the design and launch of the euro in 1999.
Without question, numerous avoidable mistakes were made, not least among them the decision to allow Greece to join the euro in the first place. That should never have happened, quite simply because Greece did not meet the terms of membership of the eurozone, including limits on its budget deficit. And once it was in, it should not have been allowed to launch itself on a debt-driven spending spree that made its already bad fiscal situation even worse.
Flaws in the original design of the euro
But it did not help that the design of the euro was flawed, with too little authority given to the European Central Bank to keep an eye on budgets in its member states. This was, as much as anything, a politically driven mistake; there was enough doubt about adopting the euro without the governments and voters of the member states giving up control over fiscal as well as monetary policy.
In terms of the future, the most likely outcome is that after some brinkmanship that allows Greek political leaders to boast that they are not going to be pushed around by “Brussels” or the rest of the EU, a deal will be worked out. The flaws of the current Greek bailout will be addressed, a more sensible set of requirements will be imposed on Greece, and the headline writers of the world will have to set aside their more lurid adjectives. Greeks and their government will hopefully learn the wisdom of borrowing only within their means and paying their taxes.
A less likely outcome is that Greece will indeed leave the euro, but that the longer-term effects will not be as dire as most economists are predicting. Life for Greeks will briefly worsen, and their crash course in how to stop mismanaging their economy will intensify, but they will adapt. Meanwhile, the rest of the eurozone will make the policy and institutional adjustments needed to move on without the participation of this small and troublesome partner.
Learning what works – and what doesn’t
As for the bigger questions of how this will impact the euro and the European Union, the crisis will go down as the latest in the hard process of learning what works and what doesn’t as Europeans continue their efforts to build regional integration.
Jean Monnet, one of the founding fathers of what is now the EU, long ago warned that Europe would be built from crisis, and that it would be the sum of the solutions adopted. Not a cheerful dictum, to be sure, but realistic given the pioneering nature of European integration and the human nature of its designers and leaders.
At the end of the day, and whatever unfolds, the EU and the euro will weather the storm and emerge chastened but wiser. They are both, after all, too big to fail.