When things get completely out of hand in a bad marriage, divorce is certainly one way to end it. But divorce is always costly, and there can be no doubt that Greek exiting the eurozone would involve enormous costs both for Greece and the euro area.
Time is running out and it seems that the Greek exit may be the best way to end the acrimonious relationship that now exists between Greece and the eurozone. However, before both sides run to the best lawyers, Greek politicians should pause for a moment and think again what led them to join the European Union in the first place and calculate not only the benefits but the costs of a divorce.
Leaving the EU would open up new economic and political possibilities for Greece. It would allow it to issue a new drachma that could be devalued to improve the competitiveness of its exports and would, no doubt, create a powerful sense of freedom, of liberation, knowing that its fate was in its own hands. It might even generate a renewed commitment to repair the fiscal laws in the state - most notably, rampant tax evasion...
So far so good, some may say, but it's not all that rosy. With divorce, Greece would experience a run on the banks, a panicked flight of capital, an inevitable return of capital controls and bank closures. The new drachma would plunge in value, raising the price of imports such as oil and gas which are priced in foreign currencies, and increasing the trade deficit. In one word, this divorce will certainly plunge the country into chaos.
The costs of such a divorce would also be huge for the euro area as well. Much, if not all of the outstanding claims of European banks on Greek banks would be lost once the Greek banks closed their doors! As at the end of 2014, these claims totalled 50 billion euro.
Time is short. But there is still time to save this marriage if both sides try hard enough!
Jos Edmond Zarb
Birkirkara