Greece and the euro: Was it worth it?

Economist
July 4, 2011

Steve Waldman asks the burning question:

Suppose that Greece had never adopted the Euro and the terms of its external borrowing had remained subject to “market discipline”, as it had been in the 1990s. Would Greece today be better off or worse off, in real terms, looking forward?

The question is impossible to answer, obviously, but it's worth thinking about all the same. As Mr Waldman indicates, Greece was able to borrow on unrealistically good terms for most of the last decade; somewhat surprisingly, national interest rates converged in the wake of the adoption of the euro. This contributed to Greece's accumulation of debt, and only when market forces began to reassert themselves and peripheral yields diverged from core yields did it become clear that Greece's debt burden was unsustainable.

Of course, market discipline isn't the only discipline around. Entrance into the euro zone was contingent on Greece's accomplishing certain reforms and achieving a required level of macroeconomic prudence. Greece clearly fell short of the standards of good behaviour other euro-zone members had in mind, but economic research indicates that even when fiscal rules don't strictly bind they can nonetheless have a positive effect. The process of entering the euro zone didn't turn Greece into Germany, but it may have left Greece in better institutional shape than it otherwise might have been.

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