By JOSEF JOFFE
If Greece doesn't get another rescue package, it will be in default by mid-July. With two-year Greek bonds fetching yields of 26%, markets are telling the Greeks that bankruptcy is precisely what they expect, never mind whether the euphemism to be used is "restructuring" or "reprofiling."
Like previous rescues, the next one—and the one after that—will merely postpone Judgment Day. Ultimately there are three possible outcomes to Greece's current predicament: 1) Europe bleeds forever, treating Greece as a permanent welfare case; 2) The EU swallows Greece's default, or "reprofiles" the Greek debt—the international equivalent of Chapter 11 bankruptcy; 3) Greece abandons the euro.
Which is the least-bad option? Forget the dole. Aching under their own spending cuts, Europe's richer nations won't keep paying for Greece sine die. "Why should we scrounge, while others squander?" is the sentiment driving voters into the arms of populist parties from France to Finland. Even if keeping Greece on the bailout drip were economically feasible, it has become a political impossibility.
German Chancellor Angela Merkel seems to prefer option two, a reprofiling that would buy some more time for Greece to get its finances in order. As the U.S. experience with Chapter 11 shows, protecting borrowers from creditors sometimes works. If a company no longer needs to hemorrhage cash in order to service its debt, it can pump revenues into productive investments and regain profitability. At a minimum, it gets a reprieve and a chance to bring its costs in line with income.
But that scenario seems unlikely in Greece's case. This is an economy that grew nicely after it joined the euro—faster, at any rate, than the euro zone as a whole. Yet as in Europe's other problem countries, the gift of the euro came with a poison pill: When it ditched the drachma for the euro, Greece was suddenly able to borrow at low interest rates. And it did—lots. Why save if you can sponge? Why bring an economy rife with cronyism, protectionism, tax evasion and corruption into the globalized world when money is so cheap? Today, Athens owes its creditors in Europe and beyond more than €300 billion.
Greece's problem is not just liquidity, which could be solved by injections from abroad. Rather, Greece's debt crisis is rooted in its economic fundamentals, and nothing short of fundamental reform could improve its long-term prospects under the euro. Here are some telling numbers: While unit-labor costs in Greece have shot up 15 percentage points since 2005, they rose by only five points in Germany. To restore their lost competitiveness, Greeks and their government would have to agree on a new social contract between them, one that demolishes market barriers and privileges, and in particular those that coddle a bloated public sector that makes up 25% of the work force.
But how many societies could bear such a revolution, especially one ordered by foreigners? Last year, facing the prospect of even modest reforms, the Greeks answered with bloody riots to protest the demands of their supposed tormentors abroad. This year, Greeks are doubling down on their bet against their own ability to change, and are cleaning out their bank accounts and dispatching their euros to Switzerland and Britain—or to their own bedrooms, underneath their mattress.
Which brings us to option three, which sees Greece absconding from the euro, flanked by default and devaluation. This represents the unthinkable for most good Europeans, who worry that Greece's departure from the euro could well mean the end of the European project. Meanwhile, across the Continent, banks and insurance companies would falter; pension funds would go belly-up, and—given a likely haircut of €0.50 per euro of Greek debt—Europe's taxpayers would have to pump up the asset side of banks' balance sheets. At the same time, Greece would sink ever-deeper into its hole, having to pay back euro-denominated debt with drastically shrunken drachmas.
But if the Greeks stay in the euro, they are also facing a default-cum-haircut. That, too, would wreak havoc on the balance sheets of European banks and insurers. How bad would it be? That depends on who holds how much, which creditors are otherwise in strong positions, and how many financial institutions would need (more) public funds to survive a Greek restructuring. This author does not pretend to know the answers to these questions, but Argentina offers at least one historical example suggesting that in the end, abandoning the euro and devaluing the drachma would leave Greece better off than another rescue package that would merely postpone bankruptcy.
At the beginning of the last decade, Argentina resembled Greece in many ways. It had entered a kind of monetary union with the U.S. by chaining its peso to the dollar one-to-one. It then used the resulting low interest rates to dramatically increase its foreign debts, and its external deficits exploded. Eventually, the International Monetary Fund arrived on scene with a series of financial rescue packages that failed to stave off disaster. Riots erupted, governments fell, cash left the country by the suitcase. In the end, Argentina's creditors had to accept haircuts anyway, losing $0.65 cents per dollar of their loans to Argentina. Unchained from the greenback, the Argentinian peso plummeted to $0.28.
But: Devaluation worked just as the textbooks said it should. Imports fell, exports rose. For a while, nobody wanted to lend Argentina a penny. But soon investors returned, and today Argentina boasts 9% annual growth, an external trade surplus worth 3% of GDP and a public-debt ratio of only 41% of GDP.
Greece won't have such a happy ending, complete with restored competitiveness and external balances, if it remains a member of a currency whose parity the central bank can't affect. If it stays in the euro, Greece faces default and stagnation. If it scraps the euro, it still faces default, but also devaluation and a chance for growth. This is a horrifying predicament. But what is better—going the Argentinian way, or staying in the euro?
Mr. Joffe is editor of Die Zeit newspaper in Hamburg. He is also a senior fellow at the Freeman-Spogli Institute for International Studies and the Abramowitz Fellow at the Hoover Institution, both at Stanford University.