There are many reasons why a weak economy might want to join with stronger ones in a currency union. The first is trade: it removes cross-border currency risk and puts genuine competitive pressure on domestic firms which will, if they have the ability to innovate and specialize, in time drive up productivity and growth. The second is investment. It is less of a risky proposition for a multinational to invest in a weaker economy if it knows that any return on that investment will not vaporise if the currency devalues. The third, and in the case of the euro the most important, is that it provides a balancing force to the pressures on policymakers to print money to buy their way out of problems, and devalue for short-term economic advantage. 

In order to prevent free-riding, joining the euro came at a price. Deficits and debt levels need to be manageable: remember the Maastrict criteria that said debt levels needed to come down to 60 per cent of GDP. The problem with Greece is it appears they were far less solvent at the beginning of their euro adventure than they cared to admit. 

But regardless of whether they should have been let in, it is inconceivable that outside the euro, Greece’s leaders would have put a restructuring austerity package to the confidence vote and survived. In the medium term, that will be to their economic credit. In the short term it will of course be tough. But imagine the alternative. If it wanted to, Greece could tell its EU partners it intended to leave the single currency. It would pass a law to make the euro illegal tender, allow its banks to swap euros for new drachmas at a predetermined rate, and then let the new drachma float. It would of course collapse. The new Greek central bank could then print as many new drachma as it wanted, pay off the unions and other vested interests, and inflation would soar.  Who would invest in Greece then?

Of course it isn’t exactly an attractive prospect to invest in Greece at the moment. If banks and other creditors are forced to reschedule their debts then that is the same as a default. But as any insolvent organization knows, a managed process for dealing with this is far better than a chaotic one. If necessary, Greece should default if that gives it the space to restructure. But it should stay in the euro while it does so. Outside the currency union there will be little incentive to go through the pain to get the long-term gain. Economic historians will point to this time as the moment when Greek economic ministers were forced to grow up.

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