May 28, 2012

THESE ARE TENSE times for the global economy. China seems headed for at least a mild downshifting in its previously hectic growth. Brazil’s central bank says that country’s economy contracted in the first quarter of 2012. Bond-rating agencies have just marked down Japan’s debt. The United States, though relatively strong compared to other industrial countries, has just notched a decline in business orders for capital goods. And in Europe, where a recession is underway, worse could be in the offing because of the threat that Greece will end its membership in the common currency, the euro.

In hindsight, Greece’s looming insolvency confirms the wisdom of those who warned that yoking an inefficient Balkan economy to the German powerhouse was a prescription for disaster. Indeed, the entire common currency now looks like a bridge too far for the otherwise laudable project of European integration.

But those bells cannot be unrung. If Greece can be maintained within the euro at an acceptable cost, financial and political, it should be. The downside of a “Grexit,” as the possible reintroduction of the drachma has come to be known, includes deeper recession and spreading financial instability throughout Europe — and the world. After a Grexit, Greece itself could be plunged into poverty and institutional chaos that overwhelm what’s left of its corrupt and fragile state. Over time, a devalued currency could help Greece recover its competitiveness and grow, even as it remained shut out of financial markets. But in the meanwhile, Greek politics could take a turn down the same populist road that countries such as Argentina and Venezuela have recently traveled. The temptation for the Greeks to seek aid from Moscow, and for the Russians to oblige them in return for a cheap toehold in Europe, could prove impossible to resist.

Greece would remain in the European Union, but the federation as well as the currency could be grievously wounded. Spain, Portugal and Italy might have to fight off bank runs and speculation that they would be next to abandon the euro. Countries on the way to E.U. membership and the stabilizing influence it offers, including other Balkan states, could retreat. Serbia’s voters already installed a euro-skeptic as president this month. Hungary’s government is tilting toward populism and autocracy; in a weakening union, others could follow suit.

This potential nightmare is why all parties, from the Greek electorate to Europe’s paymasters in Berlin, insist that they want to keep Greece in the euro. Where Europeans differ is on the terms under which that must occur. The leftist party at the top of the polls heading into Greece’s June 17 election, Syriza, declares that the country must repudiate the “barbaric” austerity package it had previously agreed to in return for European and International Monetary Fund bailout money. Syriza’s unspoken assumption is that Germany will offer easier terms rather than risk a Greek collapse.

THE UPSHOT is that much of the world’s fate — too much for comfort — is in the hands of Greek voters. German Chancellor Angela Merkel’s government is doing its best to convince the Greek people that Germany isn’t bluffing when it says the austerity package is the only way for Greece to keep the euro. Berlin’s efforts include modest acknowledgments that Southern Europe needs more help growing, coupled with a series of apparently strategic leaks from Berlin suggesting that, regrettable though a Grexit might be, Europe could survive it.

This seems strategically sound. Whether Germany’s insistence on austerity and restructuring is correct in principle or not — and there’s ample room for debate on that point — the worst thing to do would be to abandon it in the face of a populist revolt by Syriza or other extremists of the left and right. That would send the wrong signal to those who would create similar mischief across Southern Europe.

If there is to be any relaxation in the austerity program, it should be a reward for a clear Greek vote in favor of continued euro membership on June 17. Unfortunately, Ms. Merkel’s efforts to define the pending election in those terms are being undermined by French President Francois Hollande, who used the recent meeting of European leaders to push for joint “euro bonds” and more money-printing by the European Central Bank.

Though perhaps useful as part of some end-game, after troubled debtor nations have restructured their economies, the measures Mr. Hollande advocates cannot win German support now because Berlin, not unreasonably, believes that they would relieve pressure for necessary reforms. All Mr. Hollande is accomplishing is encouraging those in Greece who seem bent on gambling with their country’s future and the economic health of the world.

There may be no way to salvage Greek membership in the euro, given that country’s profound economic decay — and given the differences that now bedevil “united” Europe. It is responsible of Europe’s governments to plan for damage control in the event of a Grexit, as they are apparently doing. For the time being, though, a Grexit is still only a terrible risk. Europe’s leaders — and Greek voters — need to avoid doing anything that might turn it into a terrible inevitability.