With a Greek exit from the euro zone now widely seen as a foregone conclusion, it is worth reflecting on the following:
- Polls show more than 70% of Greeks don't want to dump the euro.
- Angela Merkel and most other euro-zone leaders, although regretting the day they let Greece into their club, are terrified of the financial contagion its exit might bring.
- None of the three main parties vying for control of the Greek government are advocating a euro exit.
- The Institute of International Finance, which represents the world's biggest banks, is lobbying hard for Greece to stay in the monetary union.
- Greece's finances aren't subject to market pressure in the way that Spain's are because its debt refinancing needs are currently covered by the European Financial Stability Facility and the International Monetary Fund.
For the "inevitable" to occur, in other words, a group of people must consciously make decisions that they know will produce an outcome none of them want. In fact, it requires them to take actions that could unleash such financial chaos that it will end their political careers.
As irrational as that sounds, the history of financial crises tells us that economic and political forces can often compel governments to commit political suicide. With that history in mind, investors have concluded that politicians in Greece and Germany won't reconcile the gap between an austerity-weary Greek public and a German electorate that doesn't want to hand over more money without more belt-tightening.
The most important precedent for this was Argentina's crisis of 2001, which climaxed with an equally unpopular end to the Argentine peso's one-to-one peg to the U.S. dollar and an outburst of financial and political chaos.
Then, as now, an outside body of public sector creditors (the IMF) and its biggest government backer (the U.S.) were under political pressure to withhold money from a foreign country with a reputation for poor discipline. (Recall Treasury Secretary Paul O'Neill's warning against Argentina consuming the money of American "plumbers and carpenters.") There was also militant resistance among Argentines to the IMF's austerity program, including outright rebellion against a 13% cut in pensions and public sector salaries that forced the government to unwind the measure.
Eventually, decisions by the Argentine government--in particular, the highly unpopular "corralito" limit on locals' bank withdrawals--and by the IMF, which refused to approve a disbursement of $1.3 billion in early December 2001, put the country on a self-fulfilling path to default and devaluation. Few Argentines wanted to end the currency "convertibility" plan, and yet within a month, after a political meltdown that churned through five presidents in two weeks, that is what happened.
I asked the two Argentine policy makers most directly involved in trying to save Argentina from that outcome to reflect on those moments and offer advice to the Greeks. Strikingly, their prescriptions differed, which seemed to correspond with the extent to which each was politically invested in protecting the convertibility plan 10 years ago.
"To me it is a barbarity that many are recommending a euro exit," said Domingo Cavallo, who was the economy minister until President Fernando de la Rua's downfall on Dec. 21, 2001. "The more they recommend it, the more it will aggravate Greece's crisis." He says Greece should hang on to the euro because leaving it will only invite hyperinflation and turn into the "pariah of Europe," much as Argentina was turned into an international rogue by its actions.
Mr. Cavallo was known as the father of the convertibility plan, having introduced the dollar peg during his first ministerial stint in 1991, which immediately ended a hyperinflation nightmare. Ten years later, Mr. De la Rua brought him back to try to save the system. His entire reputation was invested in doing so. Now teaching at Yale, he rejects the conventional wisdom that the peg had to go. In his mind, its end reflected "a failure of leadership."
But how should the government have contended with society's fierce resistance to austerity, I asked. Mr. Cavallo's response: "That's what it means to govern. You must make tough decisions." Similarly, he said, the IMF and Argentina's creditors lacked leadership in not recognizing the international ramifications of their actions. By pulling the plug on Argentina, Mr. Cavallo said, they fanned the flames of anti-market, anti-U.S. sentiment across Latin America, which brought Hugo Chavez to power in Venezuela and led to the failure of the Washington-backed Free Trade Area of the Americas. It should be a warning to Germany, he said.
Daniel Marx, who was finance secretary under Mr. Cavallo until he abruptly resigned on Dec. 15, 2001, takes a different approach. He said the most important steps were to "build political consensus" within Greek society and establish policies that "distribute losses fairly" and protect "the social fabric," including a devaluation if need be.
It isn't clear that either man's advice is of much use to Greece at this late stage. But in their own way, each homes in on what is needed: leaders who look beyond short-term political costs and decide what is truly best for society. Whether Greece leaves the euro or not, if the decision is made under those conditions, it will be for the better.—Michael Casey is managing editor for the Americas at DJ FX Trader, a foreign exchange news service jointly produced by Dow Jones Newswires and The Wall Street Journal. He is also the author a newly published book on the global financial system, "The Unfair Trade." He can be reached at firstname.lastname@example.org.