Failure is not an option when it comes to Greece

Dust off your drachmas! Greece is returning to its rightful place at the dim outer reaches of Europe, according to eurosceptics.

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Dust off your drachmas! Greece is returning to its rightful place at the dim outer reaches of Europe. At least that is how Martin Feldstein and his like-minded eurosceptics see things. The Harvard University economist argued in the Financial Times last week that spendthrift and book-cooking Greece should be allowed to dump the euro in order to get its financial house in order. Reviving and devaluing the drachma, he wrote, would restore for Athens the kind of exchange-rate flexibility it and certain other euro zone members should never have relinquished in the first place. Only then can Greece export its way back to fiscal stability.

The Feldstein plan represents one side in a rigorous debate over the fate of Athens, and by extrapolation, the euro itself, which was the subject of a seminar last week hosted by the Carnegie Endowment for International Peace in Washington. While eurosceptics consider the prospect of a Greek default - and the contagion effect it might have on other states on the European periphery - as the last chapter in a failed attempt at currency union, europeanists regarded a Greek bailout as the inevitable first step towards a reformed and more robust euroland.

Desmond Lachman, a senior fellow at the conservative American Enterprise Institute, came to bury the euro, not to praise it. The euro, he said, was a "disastrous experiment" conceived in the sin of political imperative. The Greek economy, with a net public debt equal to 70 per cent of GDP, would deteriorate only so long as it remained tethered to the euro. Without a resurrection of the drachma, according to Mr Lachman, Athens's only option is the politically unacceptable mix of tax increases and spending cuts, which in all likelihood means prolonged recession and unsustainably high unemployment rates. And as Greece goes, so go the stricken economies of Spain, Portugal, and Ireland. "All these countries have extreme difficulties," he said. "They are all highly vulnerable."

Asked about his outlook for the future, Mr Lachman told the audience, without a hint of irony: "I have faith in prayer." A more sanguine counterpoint to Mr Lachman's death knell was presented by Angel Ubide, a visiting fellow at the Peterson Institute for International Economics. For Mr Ubide, it was all but unthinkable that Greece, or any other euro-zone member, would bolt from the currency union. In the first place, the succession protocol as laid out in the Lisbon Treaty could take years to complete, while the accession process - getting back in - would take another two years or so.

Besides, said Mr Ubide, Greece's problem is not so much about exchange-rate independence as it is a breakdown in fiscal discipline. "It's time to adjust," he said. "And it's a political message that the authorities need to give to their people; that it's time to tighten their belts." True, Athens's austerity plan was given a thumbs down last week by EU finance ministers. But as Mr Ubide put it, failure is not an option. "There is a political commitment to a European Union and a European monetary union and that's it," he said.

In return, Greece, like other troubled euro-zone members, will have to adopt painful reforms it was able to ignore during the boom years. It must reform labour and tax laws, for example, and raise the retirement limit for an ageing population. Eventually, said Mr Ubide, currency union economies must embrace a common fiscal policy as well as a shared monetary regime. Mr Lachman had a point about the precipitous way in which weaker euro-zone members were forced to shed their foreign-exchange systems while the equilibrium gap between them and powerhouses such as France and Germany was so vast. But as this column argued in November, the euro has, over the last decade or so, built up a respectable record for itself.

Since its introduction, according to the EU, per-capita GDP has increased and euro-related trade and labour reforms have led to greater employment across the continent. The shared currency has also evolved into a safe haven - most recently during the Iceland implosion - at a time when demand for a viable alternative to the dollar grows ever stronger. The eurosceptic's proposed solution to the euro-zone's plight - the revival by weak members of their pre-euro currencies - would be likely to trigger a race-to-the-bottom round of devaluations that could prove even more destabilising than the mess Europe finds itself in now. With fears of a Sino-US trade war percolating as Washington prepares to confront Beijing over its currency manipulation, the last thing the world needs is a mercantilist street fight in Europe.

Mr Ubide's faith in the political will of EU members may be overdone, but the euro is most likely here to stay. That should be the departure point for any thoughtful debate over what should be done with Greece.