Yes or No: Should Greece Exit the Euro?

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As Greek citizens prepare for what could potentially be the most important referendum in a generation, Louis-Philippe Rochon, James GalbraithTheodore Koutsobinas, Arne Heise and Philippos Sachinidis consider the arguments for and against exiting the eurozone.

Louis-Philippe Rochon, Co-Editor, Review of Keynesian Economics

‘Should I stay or should I go?’

There is a certain irony in reading the lyrics to the 1981 song by the Clash. In a way, it reads like it could have been written by Homer today, describing the European drama unfolding before us: “It’s always tease, tease, tease. You’re happy when I’m on my knees … If I go there will be trouble … Should I stay or should I go?”

The current ‘clash’ being played out in Europe at the moment between Greece and, well, everyone else, is certainly partly about economics. After all, the Greek economy has shrunk by close to 25% largely as a result of the draconian and absurd austerity policies imposed by the ‘institutions’ and Germany. Any more austerity will certainly reduce Greece to a pittance of its former self. In this sense, Greece is correct in opposing continued austerity and the imposition of primary surpluses. So far, the troika’s handling of the crisis has made things far worse, not better.

But there is certainly more going on. When witnessing the struggles of a small country like Greece trying to push against the formidable force of the institutions-formally-known-as-the-troika, we cannot but wonder if this drama is as much about economics as it is about the exercise of power and control. Imagine what would happen if independent and sovereign countries actually tried to exercise that frightful ‘D’ word. After all, isn’t democracy always the rallying cry of the oppressed? The gall of those Greeks! Oh wait, they did invent the concept, no?

Moreover, this power struggle seems to have another very specific aim: to crush left-thinking political parties like Syriza and Podemos, in Spain.

What is at stake is considerable. One could say without exaggeration that we are truly seeing the future of Greece unfolding. Greece faces a dark future, irrespective of the path it chooses. The question simply is: which path is less painful?

So, Should Greece leave the Euro?

There are, in my opinion, only four possible paths. These are:

  • The status quo with continued austerity
  • The status quo without (or with less) austerity
  • Political union and integration
  • Grexit

The first possible scenario is simply the current status quo, with continued austerity measures imposed by Germany and the Troika, despite the fact that considerable research, much of it within the IMF itself, showing how austerity does not and will not work. Under this scenario, Greece will agree to implement whatever policies are dictated to it. Greece will continue to aim to have annual primary surpluses by whichever means possible, which in the end will condemn it to depression-style existence, with possible contagion effects contributing to the eventual imploding of the European economy.

Our second option is the satus quo with less austerity. I doubt this could happen in the current political and ideological climate. But let’s assume it occurs through the divine intervention of Zeus himself. While certainly presenting Greece with some much-needed room to breath, it fails to address the flaws of the Euro itself: an illegitimate arrangement that consists of a monetary union without political union. Eventually, deflationary pressures will take hold again and we would simply repeat history.

The third scenario, that of political union with a monetary union, represents a major institutional change that would resolve much of the problems in the previous scenario. Indeed, as many heterodox economists, in particular my good friend Alain Parguez, have been saying since the creation of the Euro, you cannot have monetary union without political or fiscal union. But this path must be rejected as a non-starter: there is no political will in Germany to share its wealth with countries that she sees as victims of their own fiscal mismanagement and incompetence. Yet, short of leaving the Euro, this scenario would be quite acceptable as it would create a true European federation, with automatic transfers between the rich and poor countries, which could in many respects, minimize the impact of austerity. But it will never happen and so it is really not worth considering further.

This leaves us only with the last option: a true grexit. Under this scenario, Greece would leave the Euro, and either return to the drachma or create another new currency. In doing so, Greece would gain something considerable: monetary and fiscal sovereignty. Of course, the road ahead would be fraught with considerable darkness. Such a strategy would have to be accompanied by a panoply of reforms and policies: some capital controls, massive state intervention, reforms of the tax system (taxing capital gains), and more. It would not be an easy path, but it is I believe the most logical and least painful one.

The decision therefore comes down essentially to two extreme positions: either the status quo or a grexit. Both routes are perilous, indeed. So the decision is between more austerity and no future, while remaining a slave to the troika, or, full independence, control of its own monetary and fiscal policies, and certainly some difficult, but in no way impossible, times ahead.

If heterodox economists are unanimous in their support of Greece’s anti-austerity politics, there is far less agreement as to whether Greece should leave the Euro, or remain a faithful lapdog within it. Yet, this indecision only reflects the deep, and complicated issues at hand. There are not only economic issues, but political, social, historical and geopolitical questions to consider.

Despite the certain difficult situation and the considerable uncertainly regarding the possibility of abandoning the Euro, Greece would gain control over its future, and hopefully the right policies adopted to ensure prosperity.

In so many ways, a Grexit is the only possible and logical outcome to this austerian imbroglio.




James Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at the Lyndon B Johnson School of Public Affairs.

The elected Greek government will not exit the Euro.  It is philosophically pro-European. It has no mandate to exit the Euro.  It cannot be forced out of the Euro or the European Union.

For these reasons, the question is moot. The only issue on Sunday is whether the Greek people accept or reject the conditions demanded by the creditors.  If they say “no”, the government will go back to the negotiations.  What happens then, will be up to the European partners and the IMF, and not to the Greeks.

The shameful threats leveled Monday about the referendum were not about what Greece should do.  They were about defeating the Greek government in the referendum, and securing a more compliant debt colony in Greece.  That could happen – but it would be unlikely to last long. There is such a thing as Pyrrhic Victory.

In that case, down the road, when the Nazis are the official Opposition, you might try posing this question again.




Theodore Koutsobinas is the Author of The Political Economy of Status: Superstars, Markets and Culture Change published by Edward Elgar Publishing, 2014.

A Yes Strategy to Build Common Ground with Europe Must Defeat Risky Depression Politics

After five years of austerity and depression in Greece, the success of the left coalition Syriza was built on the maximalist premise that it could deliver the same financial aid with fewer austere measures than its predecessors. However, while with its Thessaloniki election program it promised 15 bn. Euro in money transfers, its last proposal to the lenders last week included 8 bn Euro of payments. This implies a 23bn. Euro difference, which is hard to swallow. So now that this political promise appears a naked lie, Syriza gives up the responsibility for its own failure to deliver, passes the hot potato to the Greek public and calls for a referendum to be held on Sunday with banks closed and pictures of queues of miserable Greeks creating a shock to the world.

Yet, there are apparent signs of international sympathy to a NO vote on the basis that during the negotiations the troika was not democratic. In contrast, it sought to help replace the Greek government and, eventually, it made Tsipras an offer he could not accept. This is the easy conclusion to make as some of the lenders like France and Italy support Greece. More importantly, the strategy and the the overall attitude of the Greek government during five months of negotiations with the Troika did not create also the necessary trust to move forward. Evidently, a substantive part of the blame goes also to the Greek government.

This is so because in February 2015, the Syriza government signed an agreement with the Troika of institutions about conducting negotiations for the continuation and completion of the on-going aid program. Restructuring Greek debt was never a prerequisite for coming to an agreement, although mention was made to a restructuring promise of Troika in 2012 to the then modest Greek coalition government once sustainable surpluses appear. While it was never meant to be considered by the lenders during this phase of negotiations and this was made repeatedly clear by key players, the debt restructuring issue was used deceptively by the Syriza negotiation team at the very last minute as an excuse to call a referendum.

The Greek government could obtain a much better deal than its last offer in the beginning of the negotiations. It chose instead to consume itself in playing game-theory manoeuvres, endless rhetoric, and shameless bluffing. Syriza officials promised the Greek electorate that “we will annul the memorandum with one law”, “we will ask help from Russia”, “we will join BRICS”’, “we will create a global financial turmoil with the collapse of negotiations”, “we will make it Kougki” – a reference to Harakiri threats – and so on, none of which materialized while some caused universal amusement. So, with the memorandum program coming to an end, Greek bets have run out and the referendum was called. After Tsipras arguing publicly that “there will be no referendum”, “banks will not close”, “we will pay the IMF on 30th of June”, “pensions will be paid normally”, he now claims that he guarantees personally; there will be no haircut in deposits” with no sufficient cash and no ELA support from ECB. Apparently, there is a trust problem in those negotiations but this does not concern only the lenders but gravely also the Greek government.

In addition, the referendum was called because the primary concern of Tsipras was the unity of Syriza party. Several hardline factions made earlier clear to him that they would not support an agreement of 23 bn.Euro difference in the parliament. As a result, the authority of Tsipras in the party and his political future are no more sustainable and those are the only reasons that he called a referendum, despite appeals to democratic values.

There have been many complex arguments in favour or against a YES vote. I opt for an easy but sensible reason. Syriza government supports a NO vote, the implications of which are very uncertain, because it does not minimize the failure of negotiations and the return to drachma, quite the contrary. Yet, economic depression in Greece during the last five years does not mean that we are left only with one solution, that is, drachma poverty at the name of anti-austerity. On the contrary, there are variable solutions and the Greek people is not obliged to choose only between the potentially good, the bad and the worse. The vote to YES is more probable to bring Greece to have a future so that it looks like Portugal, a degraded but promising economy of the European south rather than like transition Balkan countries such as Romania and Bulgaria. Neither are good options, but one is obviously worse than the others. For this reason, Greece must return to developing common ground with the lenders.

In the end of day, this referendum which, contrary to contentions of the Syriza government, is staged in a way that falls short of international democracy standards according to the Council of Europe with its ballot distortions, short campaign period and vague question, YES or NO on the proposal of lenders at a given date, makes sense only whether it means an answer to stay or exit Euro. But in doing so, the Greek electorate will actually decide whether it is the Syriza government as it is now, or a new coalition government that will be legitimate to attempt to come to a final agreement with the lenders. Yes, it is about politics again. Yes, Greece can stay in the Eurozone but the less risky way for this to happen is a YES vote for all that it means.




Arne Heise, Professor of Economics and Public Governance at Hamburg University, Germany

First of all, it should be pointed out that the question of whether Greece should exit the Euro is not equivalent to the question of whether Greece should have been kept out of the Euro in the first place. Although the answer to the latter is arguably ‘yes‘ as Greece did not fulfil the requirements of nominal, real and institutional convergence necessary to participate beneficially in a common currency, the answer to the former question is more difficult to answer for two reasons:

  • The short term costs for Greece of break-away from the Eurozone are too uncertain to be rationally compared to potential long-term benefits.
  • It is not merely the participation or non-participation in a common currency which is beneficial for Greece (and any other participant) but the way the Eurozone is governed.

Let me elaborate a bit on the last point: I have argued in a forthcoming article in the Review of Keynesian Economics (ROKE) that the European Monetary Union (EMU) faces an ‘inconsistent triangle‘ which means that a neoliberal economic policy orientation (‘Brussels-Frankfurt Consensus‘), the long-term survival of EMU and popular support for EMU cannot be squared. Or to put it differently: if there is enough political will to guarantee the survival of EMU and popular support is seen as necessary, neoliberal policies cannot be pursued much longer. Or: If neoliberal policies are to be defended as much as the EMU project, this will harm popular support and deform democratic decision-making further (beyond the endemic and well known ‘democratic deficit‘ in the EU). Moreover, Greece appeared to be a point in case: the neoliberal austerity measures enforced by the ‘institutions‘ caused a severe decline in support for EMU in Greece and washed a left-wing government in office which was very critical in continuing Greece’s participation in EMU.

Until the ‘Greece tragedy‘ unfolded, I used to argue that unshakable political support for EMU from the European (political and economic) elites would be the best possible way to change policy orientation as long as popular support in functioning democracies in Europe is regarded as a necessary condition. And Greece’s left government – probably with support from other (new) governments in southern Europe – may become the required ‘change agent‘. However, I considerably – and maybe naively – underestimated the resoluteness by which the European elite defend their neoliberal policy stance, risking a (at least partial) dissolution of EMU and accepting a further degeneration of democracies in Europe.

On the weekend, the Greek people have the choice between accepting the conditional support of the institutions implying a rather certain outlook of bleak economic and social developments for the nearer future on the one hand and the utterly uncertain short-term consequences and only very vaguely better long-term outlook in case of a break-away from the common currency on the other hand. In any case, the result will be disastrous for European integration as it either marks a turning-point in the history of ever deeper integration or the assurance that preferences of the populace are disregarded in a European Union which is unwilling to change its neoliberal orientation.

If a ‘no‘ from this weekend’s referendum would not merely mean to leave Greece behind but to make the European leaders think again about the deeper implications of such a vote (taking into consideration that still the majority of the Greek people would like to stay in the Eurozone!), there could be a chance for curing the ‘European disease‘ – admittedly, this looks naive right now.




Philippos Sachinidis, Former Minister of Finance, Greece

‘Grexit is not an answer to the problems of the Greek Economy’

Over the last five years some economists have argued that an exit of Greece from the Eurozone will benefit the growth prospects of the Greek economy. However there are good reasons to argue that a Grexit will have disastrous consequences for the Greek economy and the living standards of Greeks.

In the event of a Greek exit from the euro with no access to financial markets and\or funding provided by a program with institutional creditors, the economy will face two key financial constraints:

  1.  The current account deficit will have to be in surplus to ensure the necessary net inflow of foreign exchange to finance imports and cover external debt repayments.
  2.  The budget deficit would need to be balanced with a sudden reduction in spending or would have to be financed by the country’s central bank through the issue of a new currency. The inflationary pressures will lead to a hyperinflation.

A euro exit also implies that Greece will default on a large part of its foreign debt. Without defaulting on a substantial part of debt service obligations, the combination of devaluation and recession would push to even higher levels the total external debt and create the need for a greater and unattainable current account surpluses in order to meet foreign debt repayments. Thus, Greece will have no other choice than to default on an important part of its foreign loan obligations.

Inflation will rise pushed up by the monetization of the deficit and debt repayments, the impact of the devaluation on the CPI through the higher price of imported goods and services, together with the pressure for adjustment of nominal wages.

Following the country’s transition to the new currency, the living standards of Greeks will fall dramatically as their real income will fall. The wealth of Greeks, including the value of property and deposits, will undergo a similar sharp decline.

The argument that Greece’s exit from euro would enable the country to enhance the competitiveness of its economy through the devaluation of the currency has no substance.

Most of the key export sectors of the Greek economy, as well as a significant part of production intended for domestic consumption, rely on imported raw materials and imports of intermediate and capital goods which it would be difficult for them to obtain due to the limited access to foreign exchange.

Consequently, they would be forced to reduce their output, put their survival into doubt, in turn hampering further firms’ ability to access financing and causing many in the private sector to default on their obligations with their overseas creditors.

The tourism sector – often discussed as a main beneficiary – would be unable to fully benefit since due to the geography of Greece it is particularly exposed to factors related to transportation costs and energy prices, which would absorb a significant part of the benefit gained from depreciation. In the short term at least, the tourism sector would also be severely hit by the uncertainty caused by the country’s international default.

In addition, the likelihood of increased pressure to recover salary losses resulting from domestic inflation would lead to even higher inflation than envisaged in our baseline scenario, gradually undermining any gains in competitiveness deriving from the initial devaluation.

In such conditions investment and consumption will collapse and unemployment will rise to even higher levels.

In distributional terms, the only ones to gain from a Grexit will be wealthier Greeks whose assets are already denominated in other currencies and reside abroad. The most vulnerable part of the population will be the first victims of a Grexit.

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One Comment on “Yes or No: Should Greece Exit the Euro?”

  1. BASIL MOORE Says:

    One way of understanding the Greek dilemma is to recognise the present existence of a large current account deficit, combined with a level of aggregate demand insufficient to achieve a full employment level of output.
    From a policy perspective, this requires a sufficiently large devaluation of the Drachma, to stimulate exports sufficiently to realise a current account surplus, combined with a reduction of interest rates sufficiently large to expand aggregate demand and achieve a full employment level of output.


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