Editorial: Greek exit from euro makes sense

Alexis Tsipras, centre, leader of Greece's Syriza left-wing main opposition party greets his supporters outside Syriza's headquarters in Athens. Photo / AP

Opinion

Five years ago the prospect that Greece might need to revert to a currency of its own filled the euro zone with horror. Now, not so much. Five years ago Greece was just the first of several near-bankrupt European states that would need a bail-out in the wake of the global financial crisis. The fear was that if Greece failed with Ireland, Portugal and Spain also in trouble, creditors would lose confidence in the euro and the common currency would start to unravel.

All of them received help from European Community institutions on terms that required them to take steps to live within their means. All of them except Greece have come through their debt crisis, albeit with unemployment still very high and growth slow. If Greece quits the euro now, it would not present the same risk to the currency.

That is undoubtedly why the young left-wing leader Alexis Tsipras who won Greece's election on Sunday has reportedly softened his rhetoric somewhat against the austerity imposed on it. He wants to keep Greece in the euro zone without the "pain and humiliation" of the cuts it has had to make to wages, pensions and public payrolls. He believes he can renegotiate the terms of the bail-out five years ago by the European Commission, European Central Bank and International Monetary Fund.

His main hope of doing so would seem to be a tough crack-down on Greece's notorious levels of tax avoidance, a mission which a left-wing government should pursue with a vengeance. But if the possible revenue gains are not enough to bring the country's budget back towards the euro's zone of tolerance, something will have to give. Either Mr Tsipras' Government will need to give up the euro or the country's creditors will have to forgive its debts.

It would be better for both sides - and for the world economy - if Greece was to leave the euro.

It would be better for Greece because a sovereign currency with a floating exchange rate bring about a less painful adjustment for a country living beyond its means. A restored drachma would have a low value against other currencies, making imports more expensive for Greeks but boosting their earnings from exports and tourism.

The drop in the purchasing power of their wages might be as severe as the wage cuts they have suffered for the sake of the euro but their economy's adjustment would be faster and more certain. Greece would become a cheaper place to do business and employment would soon pick up. A flexible exchange rate can make these things happen without the political resentment and resistance faced by austerity programmes for the same purpose.

A Greek exit now would be better for the euro zone, too. A common currency depends on all subscribing states agreeing on some fiscal rules. Now that Greeks have elected a party that expressly does not respect those rules, its continued membership poses a greater threat to the euro's credibility than its exit would present.

The euro plunged in value against other currencies yesterday. The sooner Greece goes, the better.