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UPDATED: June 18, 2012 NO. 25 JUNE 21, 2012
Should They Stay, or Should They Go?
A Greek exit from the euro zone would have major economic and political consequences
By Kerry Brown

PUBLIC ANGER: Greeks demonstrate against the government's austerity measures in Athens on May 1 (XINHUA)

What was unthinkable a year ago is now being thought about much more seriously. The exit of Greece from the euro zone is now being discussed increasingly by commentators, economists, and even political figures in Europe. British Prime Minister David Cameron has raised the ire of euro-zone members (the UK is not a member of this group) by declaring publicly that Germany needs to do more to avoid this outcome. He and U.S. President Barack Obama have made clear their fears that a chaotic exit would plunge the EU and then the rest of the world into a deep recession—maybe even a global depression. For everyone now, the fate of a country which constitutes less than 1 percent of the European economy is vitally important.

Exit discussions

That we are now in this worrying position is partly a result of the elections held in Greece in May, which returned a messy mixture of parties, unable to finally form a coalition. New elections will be held in June to try to come up with a result where the winners can form a workable agreement. It was not so much the unhelpful political uncertainty that arose from these elections as the fact that the one thing they made clear—perhaps the only thing—was widespread public anger about the implementation and the impact of the severe cuts to public expenditure demanded (some in Greece would say forced) on them by the other euro-zone members as part of the conditions of their bailout funding.

The Greek May election result was a highly complex one. While most Greeks in polls accept the need for action, and for staying in the euro zone, when it comes to seeing the huge impact of austerity economics on employment, social welfare, and living standards, the appetite becomes less keen. The problem is that while there is now widespread anti-austerity sentiment, the question is who is going to fund anti-austerity measures. Of Greek government expenditure, 10 percent has now to be borrowed from outside the country. The mounting costs of this are at the heart of demands by the other euro-zone partners, who are insisting that Greece live within its means. After several years of a good life, and positive economic indicators, the shock from this fall for the country has been deep.

The political commitment within the EU is still to do all they can to keep Greece within the euro zone. But already, senior political figures have started to hint at what was unsayable even just a few months ago. A German minister in late May talked of a Greek exit if things became unmanageable. Former leaders of Greece have also gone on the record mentioning what was once unmentionable—that Greece might think about departing. And while the key decision-makers in Paris and Berlin are still speaking with one voice in their demands that there be no retreat on this issue, in many finance ministries across the world officials are starting to think hard about a world where the Greeks return to their own currency.

The option of Greece sticking to austerity economics and toughing it out is still the preferred one. But the social and political costs of this are looking increasingly steep. Widespread unrest in the country will become more likely. Unemployment has already climbed to worrying levels. Politicians who speak tough against this sort of austerity are becoming more popular. Many of them have deep opposition to what they see as the integrationalist program of the EU. In their view, the economic problems offer a good opportunity to pull away from what they see as a centralist semi-federal system run from Brussels but on the whole directed from the remaining economic powerhouse of Europe, Germany.

Severe consequences

Some commentators warn that obstinately persisting with the continuation of Greece in the euro zone no matter what the cost will lead to a chaotic breakdown, fueling unrest in the country and bringing about the worst of all worlds. They feel that the only real option is to accept Greece's departure, and simply deal with it. While there would be tough short- to medium-term problems, at least in the longer term this would offer the best chances of a return to economic health for the country, and for the broader viability of the euro itself.

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