The extraordinary events of the past week in Europe have included the shattering of a taboo that could have profound consequences for the Continent: the public discussion by European leaders that Greece could exit the common currency, The Wall Street Journal reported.
The chances of Greece leaving the euro may have fallen on Thursday as the likelihood of a referendum receded. But the open airing of that possibility has broken the single most important rule governing the issue: If you're going to do it, don't advertise it beforehand.
Sending a message that exit is possible risks creating a crisis of confidence that eventually forces a government's hand, with what economists say are potentially disastrous consequences.
"The prospect of Greece exiting the euro area is seldom viewed with the proper degree of fear and trepidation," argues Willem Buiter, chief economist at Citigroup. He says the bottom line of an exit for Greece is financial collapse and an even deeper recession—or even a depression—with significant collateral damage to the rest of the euro zone.
One major issue, as Barry Eichengreen of the University of California, Berkeley, wrote in a 2007 paper, is that if a country signals it is preparing a currency change, it will likely lead to a sharp depreciation as people "rush out of domestic banks and financial assets, threatening a banking and financial-market collapse."
The chances of Greece leaving the euro may have fallen on Thursday as the likelihood of a referendum receded. But the open airing of that possibility has broken the single most important rule governing the issue: If you're going to do it, don't advertise it beforehand.
Sending a message that exit is possible risks creating a crisis of confidence that eventually forces a government's hand, with what economists say are potentially disastrous consequences.
"The prospect of Greece exiting the euro area is seldom viewed with the proper degree of fear and trepidation," argues Willem Buiter, chief economist at Citigroup. He says the bottom line of an exit for Greece is financial collapse and an even deeper recession—or even a depression—with significant collateral damage to the rest of the euro zone.
One major issue, as Barry Eichengreen of the University of California, Berkeley, wrote in a 2007 paper, is that if a country signals it is preparing a currency change, it will likely lead to a sharp depreciation as people "rush out of domestic banks and financial assets, threatening a banking and financial-market collapse." Read more. (Subscription required.)
