Is a Greek Exit from the Euro Inevitable?

by Michael Schuman

Time
May 21, 2012

For 2½ years, the world has been watching and waiting to see if debt-laden Greece can remain in the euro zone. Many have been doubtful since the beginning of the debt crisis. Greece’s government debt is simply too burdensome, the fiscal adjustment imposed on Athens is too severe, the Greeks are too resistant to the tough reforms that are necessary and the rest of Europe is too bullheaded to change its approach to suit reality. But for 2½ years, Greece has nevertheless managed to scrape by and remain in the monetary union, thanks to two European Union–IMF bailouts (totaling $300 billion), which have kept Greece on life support, and repeated promises to reform by Greece’s major political parties.

Now, however, the Greek debt crisis may finally be reaching the endgame. The likelihood of a Greek exit from the euro zone has been growing, and that has scary consequences for the rest of Europe as well as the global economy.

The spiral toward disaster has been tipped off by Greek politics. A general election earlier this month eliminated what little hope remained that Athens could press through with the painful austerity measures and structural reforms demanded by the euro zone in return for bailout cash. The fractured result made it impossible for a government to form, and a new election has been called for June 17. But even if that poll brings some political stability, the odds that the bailout can go ahead as planned are practically zero. A vast majority of the votes in the last election went to parties that either want to renegotiate the terms of the bailout or ditch the agreement entirely. Whether the bailout scheme can continue will depend on the willingness of the rest of Europe to make concessions to Greece in a better, softer rescue agreement and the willingness of Athens’ politicians to agree to new terms. These are very open questions.

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