May 29, 2012
These are tense times for the global economy. China seems headed for at least a mild downshifting in its previously hectic growth. Brazil’s central bank says that country’s economy contracted in the first quarter of 2012. Bond-rating agencies have just marked down Japan’s debt. The United States, though relatively strong compared to other industrial countries, has just notched a decline in business orders for capital goods. And in Europe, where a recession is underway, worse could be in the offing because of the threat that Greece will end its membership in the common currency, the euro.
In hindsight, Greece’s looming insolvency confirms the wisdom of those who warned that yoking an inefficient Balkan economy to the German powerhouse was a prescription for disaster. Indeed, the entire common currency now looks like a bridge too far for the otherwise laudable project of European integration.
But those bells cannot be unrung. If Greece can be maintained within the euro at an acceptable cost, financial and political, it should be. The downside of a “Grexit,” as the possible reintroduction of the drachma has come to be known, includes deeper recession and spreading financial instability throughout Europe — and the world. After a Grexit, Greece itself could be plunged into poverty and institutional chaos that overwhelm what’s left of its corrupt and fragile state. Over time, a devalued currency could help Greece recover its competitiveness and grow, even as it remained shut out of financial markets. But in the meanwhile, Greek politics could take a turn down the same populist road that countries such as Argentina and Venezuela have recently traveled. The temptation for the Greeks to seek aid from Moscow, and for the Russians to oblige them in return for a cheap toehold in Europe, could prove impossible to resist.