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After the "No" Vote, Soft Grexit Landing Now EU's Best Option

Walter Russell Mead

As Greeks streamed to the polls to reject an offer from creditors that no longer exists, the debate in Greece and around the world is between two positions: did Greece fail the euro, or did the euro fail Greece? Did Greece’s original sin of faking its way into the euro, compounded by a willful failure to reform make crisis inevitable? Or was Greece the innocent victim of a poorly designed currency union, with the consequences made much worse when the creditors insisted on round after round of crippling austerity?

Both sides are right, at least partly so. Greece has failed the euro, and the euro has failed Greece. Greece never lived up to the responsibilities of euro membership, and the creditor countries never came up with a realistic or fair plan when the troubles began.

These problems aren’t going away. After seven years of deepening crisis, it has become evident that Greece cannot change enough to fit in the European monetary union—and that the European monetary union cannot change enough to accommodate Greece. In such a case, there is only one real option: Greece needs to leave the euro, and its partners and allies need to assist it in making as smooth a transition as possible.

Many Greeks resist this conclusion for two reasons: they fear the national humiliation and shame of being forced out of a premier European institution, and they fear the mess that Greece’s current government would make of the drachma.

Outside of Greece, European leaders have fought the idea of Grexit because they fear for the European Union. The establishment of the euro is the most important common effort the union has undertaken since the end of the Cold War. It is meant to be the foundation of Europe’s progress toward the next stage of the ‘ever closer union’ that lies at the heart of the European project as EU federalists understand it. To admit that the euro has failed in one country raises unsettling questions both about the euro and about the viability of the whole European project.

The institutional and political imperatives of the Brussels bureaucracy drive toward the creation of a cosmopolitan, transnational Europe. One Ring to rule them all: one currency, one set of laws, one set of institutions, one bureaucratic order to run the vital affairs of the whole Continent. For devotees, it is an intoxicating and visionary idea, but not everyone is thrilled.

Considered abstractly, the question of whether a country whose GDP is less than two percent of the EU’s total should belong in the currency union is trivial. But if irreconcilable cultural differences between European societies mean that a single European currency is an unreasonable aspiration (at least for now), Eurocrats have much to rethink. There is the immediate and practical question of whether Italy and Spain, also, are too different from Germany and Finland to live together happily in the same currency. There is also a fundamental question that Eurocrats would rather keep off the agenda completely: what are the limits that Europe’s diversity of cultures, levels of development and aspirations impose on the architects of European order? How much Europe is too much? What are the natural limits to the European project, and what are the implications of those limits for the political and great power aspirations of Europe in the 21st century?

Worries in Athens, Brussels, Berlin and beyond about these issues led Greeks to make immense sacrifices to cling to membership in the euro, and have led the rest of the eurozone to throw immense amounts of money onto the table in an effort to keep Greek membership viable. Both sides have, it must be said, made many mistakes. The Greeks have never been willing or able to walk the Via Crucis to real reform; the creditors have never been able to acknowledge what everyone knows—that the euro itself is a deeply flawed currency creation and that bad lending practices and poor bank supervision in countries like Germany and France contributed as much to the crisis as anything that happened in Greece. But the biggest mistake that both sides have made may be their common assumption that Greece can and must remain in the eurozone.

There is little to be gained by pretending anymore; this country can’t prosper using this currency as a monetary base. Greece and the EU don’t need a divorce, but for the marriage won’t work without separate checking accounts.

For Greece to leave the euro won’t be the end of Greece and it won’t be the end of the euro. Instead of the endless, wretched battles over how to extend a bailout that doesn’t bail and to negotiate reform programs that the Greek government lacks the will and the capacity to implement, it is time to talk about how Greece can return to prosperity and stability inside the EU but outside the euro. A return to the drachma with the support and assistance of the rest of the EU, the international financial system and the United States would be a very different thing than the collapse and panic that would attend an unplanned, unfunded Grexit.

Debts now denominated in euros could, for example, be partially converted to drachmas in ways that limited the losses of international creditors while giving badly needed debt relief to the Greeks. New borrowing facilities grounded in more realistic agreements could give the Greeks a fresh start while still subjecting the country to outside discipline. Some kind of looser monetary relationship could be set up—some kind of halfway (or, perhaps, quarter-way) house between full monetary union and a completely free-floating drachma. European ambitions and Greek pride could be salvaged by declaring this to be a temporary, pragmatic step; the ultimate goal for Greece of euro membership could be maintained, though nobody would expect a new membership application any time soon.

The “No” vote will shake markets, and Greece’s already perilous position will likely soon get worse. Many Greeks may lack the money to buy their daily bread; bakeries will lack the fuel and flour with which to bake it. Separating the humanitarian needs of the Greek people at a moment of crisis from the complicated negotiations around the euro and reforms is important for both human and political reasons. German taxpayers and others can be more easily persuaded to help fund a soft landing for Greece outside of the euro than to pour more money down what most now see as a rat hole filled with particularly ungrateful and cantankerous mammals.

There are, as many European and American writers have been commenting lately, sound geopolitical reasons to prevent the worst from happening in Greece. Migration issues, NATO issues, energy issues, terrorism, Russia: an angry, inflamed, suffering and radicalized Greece on a kind of Venezuelan path to national destruction could make life much more difficult for Europeans and Americans both. These considerations should be enough to command some attention and resources from policymakers on both sides of the Atlantic sufficient to avert worst case scenarios for the Greek people.

For Grexit to be a step forward rather than a step back, Western and Greek leaders need to become more creative and forward-looking. Washington needs to stop bleating platitudes about the evils of austerity and to start thinking hard about bolstering an alliance that remains critical to its global position; Brussels and Berlin need to move beyond anger at Greek tactics to a sober calculation of Europe’s interests; the Greeks need to reflect on the cost of being represented at a grave hour of national crisis by inexperienced politicians who none of their counterparts in Europe trust or respect.

But Brussels and Berlin (and Paris, Rome and Madrid) need to realize something else. Greece’s problems under the euro have been worse than anyone else’s, but Greece is not totally unique. There are deep design flaws in the euro and the common currency has not worked nearly as well as any of its proponents hoped. The discussion over the future of Greece needs to be delinked from the discussion over the future of the euro—but that doesn’t mean that the future of the euro doesn’t need to be discussed.

Germany’s foreign minister Frank-Walter Steinmeier warned over the weekend that Grexit would be a disaster for Europe and would destroy Europe’s global credibility.

We knew that whoever pushes for a withdrawal of Greece from the eurozone as a solution to all the problems was falling short. Even if we are able to cope financially and politically with such a development, the signal of a “Grexit” to other countries outside of the EU would be disastrous. China, India and the USA are watching closely to see whether we can overcome this crisis or fail the challenge. Europe would lose its reputation and forfeit its credibility in parts of the world.

With all due respect for a serious politician struggling to find a solution to a difficult problem, Steinmeier has this exactly wrong. What is undermining Europe’s global credibility isn’t doubt about whether Greece can be kept in the euro; it is doubt about whether Europe’s current leadership and institutional base can solve serious problems in real time. Europe’s inability to find a way out of the Greek impasse has damaged Europe’s global reputation much more than an orderly Grexit would do.

The European monetary union and the European Union are both in deep trouble. The EU needs to resolve the Greek crisis not so it can go back to the pretense that all is well; it needs to resolve the Greek crisis so that it can devote its attention and resources to addressing the much more important questions about Europe’s future that make the Greek crisis look like a tempest in a tea pot.

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