BRUSSELS (Reuters) - Dismissed as foolish fantasy a year ago, the prospect of Greece leaving the euro zone has become a topic worthy of serious discussion among experts handling the crisis in recent weeks.
In public, the official line remains that no member will exit the single currency bloc, but policymakers are at least willing to exchange views on an intellectual level.
Is thinking the unthinkable a first step toward carrying it out? It would not be the first time euro zone officials have put the impossible into action.
In bailing out Greece, Ireland and Portugal, the bloc has already broken its rule that member states cannot assume the liabilities of others — the supposed “no bailout” clause.
One of the senior euro zone officials involved in crafting the rescue packages, who is leaving Brussels after several years, was asked to write an assessment for their government of the crisis with a view on where the situation was headed in the coming years.
Wondering whether there would still be 17 members of the single currency by the end of the decade, the official opined in the report, the contents of which were related to Reuters:
“There may well still be 17 members, but whether it will be the same 17 members is an open question.”
Among non euro-zone member states — which include Britain, Sweden and Denmark — senior Brussels-based officials express relief at not having joined the club and often privately discuss the once-unthinkable possibility of a state dropping out.
The euro project is at best faltering, but it is unclear whether the sovereign debt crisis will bring it to an end or whether it will emerge from a difficult teenage phase.
The 1992 Maastricht Treaty, which laid out the goal of establishing economic and monetary union, resolved to converge as well as strengthen the EU’s economies. A leveling-out of wealth and prices across the region was a long-term aim.
Critics, and the evidence, suggest that has been a failure.
In 2010, prices for consumer goods and services were more than 20 percent above the EU average in Finland and some 30 percent below in fellow euro zone member Slovakia.
Income inequality has also increased, although not shot up, in the past decade, with the richest 20 percent in the euro zone now earning five times more than the poorest 20 percent.
While few actually expect a country to abandon the single currency, the chances of it happening have substantially increased since the crisis began in late 2009, with a growing consensus that Greece will prove unable to pay its bills.
It could default and stay within the euro zone, but it is unlikely to achieve the necessary improvement of its competitive position without devaluing, by exiting the single currency.
Emergency aid may take the form of loans not hand-outs, but many economists believe a Greek default is inevitable and that its bailout, set to be doubled, is only buying time.
Financial markets certainly seem to think so.
The prices of credit default swaps imply a 80 percent chance of Greece defaulting and a probability just short of 50 percent for Ireland and Portugal.
Jean Pisani-Ferry, director of the Brussels-based Bruegel thinktank, says that to return to markets, Greece would need to reduce its debt-to-GDP ratio considerably below a current level of some 150 percent. That would require creating a sustained primary surplus of more than 8 percent, he said.
However, no advanced economy other than oil-rich Norway has consistently been able to achieve a surplus above 6 percent.
“The situation is so exceptionally severe that it’s hard to see how it can work,” Pisani-Ferry said.
There is a risk that, as Greece struggles to push through austerity and is chastised on a regular basis by the EU, IMF and European Central Bank — the troika of experts who oversee Athens’ progress — further market turmoil will be triggered.
Bank of America Merrill Lynch economists believe troika reviews at the end of November 2011 and of February 2012 will be particularly important in assessing Greece’s progress.
Policymakers have consistently said a default would be catastrophic, but if it is indeed inevitable, all that can be controlled is when it should happen and how to contain it.
Senior EU officials repeatedly said there was no “Plan B” for Greece in the run-up to last month’s Greek parliamentary votes in favor of austerity measures.
But the EU’s top economic official, Olli Rehn, said there was “no Plan B to avoid default,” implying that a contingency plan might have existed, albeit one which involved a Greek default taking place — which would break another taboo.
If you believe a Greek default is inevitable, the question is how it should proceed.
Greece could skip interest payments or reduce the principal owed and still stay within the euro zone. Creditors, banks and taxpayers within and outside Greece would take a huge hit, but Greece would still be forced to carry out savage austerity just to cut its primary deficit to zero.
A devaluation via a Greek exit from the euro would be even more tumultuous, with a likely run on Greek banks as savers withdraw their euro-denominated assets.
Greece, with a modest export to GDP ratio of some 20-25 percent, would still struggle.
“Devaluation works best if you have a strong export sector. For Greece it is small and on average imports deducted from growth more than exports added,” said Carsten Brzeski, an economist with ING in Brussels.
However, for an increasingly vocal number of commentators, devaluation is the only viable option.
“To have an economic future Greece has to be competitive,” said Martin Jacomb, the chairman of Shire Plc and a former Bank of England director. “This involves, especially for sectors such as the tourist industry, lower real wages and that is almost impossible to achieve harmoniously without devaluation.”
He points to Argentina, Latin America’s third-largest economy which defaulted on $100 billion of debt in 2002 and dropped the peso’s link to the U.S. dollar, and also to the post-split successor states of Czechoslovakia and Yugoslavia, which proved able to adopt different currencies.
Argentina rapidly returned to economic growth of around 9 percent, but the reputation it earned and its failure since to return to global capital markets in the face of U.S. litigation mean euro zone policymakers do not see it as a model to follow.
“This was less messy because they still had the peso, albeit devalued, but we have seen countries split and each part develop their own currencies successfully,” Jacomb said.
Additional reporting by Luke Baker; editing by Philippa Fletcher