New York Times
June 5, 2012
How the euro zone handles Greece will determine whether the single currency survives — and hence the future of the European Union as a whole. If a Greek exit from the euro zone is mishandled, contagion to the other struggling member-states could be uncontrollable, leading inexorably to the collapse of the euro.
However, if a Greek exit is accompanied by big institutional reforms, the currency union could still be saved. Indeed, a Greek departure could be positive for the euro zone if it freed up the political space needed for the German authorities to embrace such reforms.
Some policymakers believe that a Greek exit would be cathartic — that it would demonstrate to other struggling euro-zone economies the risks of backsliding on their fiscal targets or the terms of their bailout programs. The risk of contagion would be limited, as governments would have no choice but to knuckle down, which would reassure investors about the sustainability of their public finances. According to this view, the ejection of Greece would obviate the need for big institutional reforms of the currency union, such as debt mutualization or pan-euro zone bank protection.
There are a number of problems with this line of reasoning. First, it assumes that Greece and other hard-hit members of the euro zone could meet their fiscal targets if only they tried harder to do so. As such, it is an example of the flawed reasoning that is responsible for the crisis having spun out of control.
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