Mario Draghi, ECB president

The ugly word “Grexit” should never have been coined. More than a conventional default, a decision to walk away from a currency is more akin to ripping up the rules of the game. It has only happened at moments of historic failure, such as when Weimar Germany abandoned the old mark. No wonder the architects of the euro left no arrangements for a country to leave.

Since the radical leftwing party Syriza ascended to power, the obstreperous behaviour of its leaders has led to increasing talk of Greece leaving the euro. This is not just a threat designed to bring Athens in line. After governments of every hue failed convincingly to reform the economy, Greek voters in January elected a party that vowed to undo what progress had been made. Rather than endure the weary charade of promises delivered in bad faith in return for debts being extended, many Europeans (including most Germans) would prefer that Greece end the drama and restore the drachma.

They do so in the apparent confidence that this would no longer create an existential crisis for Europe. Financial exposure to Greece is much less than in 2012. Anyone holding Greek debts will have written them down a long way. There are now thick firewalls against the failure of one state cascading into the others. Finally, the ECB is much better equipped to tackle financial stress than at the apex of the euro-crisis three years ago.

There are voices beyond Athens who now see leaving the euro as the best way to restore Greek fortunes. With a new currency it would, at a stroke, rewrite every debt and wage contract, so the argument goes. Any transient financial distress should be balanced against an eternity trapped in the wrong currency, suffering unending deflation to bring domestic costs in line. With a restored drachma Athens could once again determine its own monetary destiny. Yanis Varoufakis, Syriza’s pugnacious new finance minister, even wrote a blog explaining how alternative arrangements might work.

Such insouciance about Grexit is a mistake. If devaluation was so beneficial Greece would never have joined the euro in the first place. A weaker currency makes imports more expensive, particularly damaging for a small economy. Replacing euro- with drachma-liabilities constitutes the kind of once-in-a-generation default that would wreck the credit system. Only Greek taxpayers could be forced to accept the new currency. Athens would need a current account surplus to guarantee access to financial markets. Rather than inaugurating a tigerish new export economy, Grexit could prolong the era of crashing living standards and emigration.

European complacency is yet more misconceived. No doubt 98 per cent of a large economy can insulate itself against the failure of a small economy, and some would welcome the departure of a frequent troublemaker. But such utilitarian calculus is beside the point. European solidarity would be gravely fractured: the inevitable default on Greek debts would deter wealthier voters from ever again helping their neighbours in financial distress. It would matter little how Europe weathered the immediate storm; the sight of a country leaving would render conceivable what had hitherto been impossible to imagine.

Exit from the single currency constitutes the sort of “unknown unknown” against which neither markets nor politicians can adequately prepare. The European project would suffer its first serious setback since the 1950s. No matter how small Greece is or how frustrating its leaders, it is far better for Europe to keep Athens in the fold.

Letter in response to this editorial:

The Greek economy is actually beginning to recover / From David R Cameron

Good may come of Grexit, after all / From Mark Mueller

Copyright The Financial Times Limited 2018. All rights reserved.