Judy Asks: Time for Greece to leave the euro?

Opinion piece (Carnegie Europe)
18 March 2015

While Greece’s membership in the euro was a mistake in retrospect, a Greek exit is no option for either the country or the single currency. The eurozone might be able to stomach the short-term consequences of an exit, but a dangerous precedent would be set.

In a future political crisis in another member state, markets might start doubting the commitment of the core countries and of the European Central Bank (ECB) to preserve the integrity of the euro. At that point, the eurozone would be back in the self-fulfilling crisis mode that policymakers scrambled for years to leave behind.A careful politician like German Chancellor Angela Merkel, in the midst of a foreign policy crisis on Europe’s Eastern border, will not risk such a scenario—and nor will the ECB, which (for good reason) is structurally conservative.

Greece might benefit in the medium term from regained monetary autonomy outside the euro, allowing it to grow faster than it would otherwise. However, the short-term disruptions would be severe; the new Greek central bank would start with little credibility; and many of the structural problems of the Greek economy would remain unresolved, limiting the upside of a Grexit in the long term. There are good reasons for the Greeks to want to stay inside the euro.

Christian Odendahl is chief economist at the Centre for European Reform.