With the discussion of different outcomes to the Greek drama growing louder, it is increasingly evident that the EU now risks squandering a great deal of time, energy, and money in ways that may be ultimately merely delaying the inevitable. In the meantime, the Greeks are taking overdue steps to downsize their bloated public sector. As necessary as this is, the aggressive austerity comes at a prohibitive cost. With a sharp and sustained drop in the scale of economic activity, Greece is looking at a lengthy period of continued decline or at best stagnation. No wonder that the resistance to the current course of action is growing on all sides.

The appeal of the much debated option of leaving the euro zone and reintroducing the Drachma comes from the relief it would offer by boosting the Greece's external competitiveness. Although the country's ability to benefit from this is limited by the weak open sector, with time a more competitive export industry would attract more investment, thereby contributing to the necessary rebalancing of the economy. More problematically, such a step would amount to a comprehensive default with devastating implications for the banking sector and much of the rest of the economy.

In the absence of devaluation, the politically necessary relief would have to be found elsewhere. Greece needs serious structural reform but also a reasonable prospect of resuming growth. A comprehensive default followed by debt restructuring, would create a much more sustainable starting point for the necessary structural reforms, rather than remaining an elusive goal after years of sacrifice. By simultaneously allowing the country to remain within the euro zone, the massive resources currently mobilized for one bailout after the next could be devoted to post-crisis reconstruction. This way, the investment would yield a return as opposed to merely delaying the inevitable. So as to avoid the massive moral hazard problem, Greece should remain under close supervision designed to ensure the necessary rebalancing of the economy and reforms needed to create more flexible labor markets and a more benign investment climate. Greece's neighbor, Turkey serves as a good example of the benefits of such an approach. Success there came after the bankruptcy of the old system was revealed by the crisis of 2000-2001.

The main risk of delaying the inevitable is a steadily rising resistance to reform within and outside the country. Eroding living standards, mass unemployment, and growing poverty will create discord and invite political populism. From the EU perspective, helping Greece has the advantage of reducing the probability of contagion to other countries and a more serious crisis. However, some countries are growing extremely skeptical of writing what are perceived as blank checks for a troubled neighbor where the “end game” remain uncertain. By contrast, accepting a sharp correction would allow all the effort from now on can be devoted to dealing with the aftermath of the crisis and hastening the return of Greece to macroeconomic stability and sustainable growth.
 
 
— Jarmo T. Kotilaine is chief economist at The National Commercial Bank, Jeddah.