Talk about drama. German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou emerged from an emergency meeting on Wednesday evening with a bombshell: Greece will have to decide if it wants to remain in the European monetary union. Merkel and Sarkozy suspended all further bailout funds until that fateful choice is made.
What a shocker. The whole idea of a member of the euro zone bolting the union has been completely taboo, even as a debt crisis has raged through Europe for two years. There isn't even any mechanism in place through which a country can exit the monetary union. The fact that this possibility has even been mentioned is a major break with the past that leaves the future very uncertain. (See how the Greek referendum puts the E.U. deal in jeopardy.)
What happens now? Hard to say. It seemed that a referendum Papandreou had called for on Monday to seek public approval of Greece's participation in the latest euro zone bailout scheme, agreed to last week at a summit of European leaders, would be transformed into a vote on the country's continued membership in the monetary union itself. But events in Athens are changing rapidly and unpredictably. Papandreou may lose a confidence vote in parliament on Friday as his supporters melt away over his referendum plan. That raises the possibility of the Greek government falling and possibly a new election being held. Greece's future in the euro zone will remain an unknown as long as the country's domestic politics remain in turmoil.
Yet this whole amazing series of events has raised an important question: Would Greece be better off in or out of the monetary union? (See pictures of the protests in Greece.)
The conventional wisdom has always been that Greece's departure from the euro zone would be a complete calamity. If Greece bolted, it would lose its European bailout and most likely default, sending shockwaves through Europe's banking system and global financial markets. The Greek banking sector would likely collapse, while the government, frozen out of capital markets, might even be unable to pay its bills. For the euro zone, Greece's defection would raise the specter of a cascading series of departures if other weak economies, also suffering in the debt crisis, chose to follow Athens's example. To sum up, it could get ugly.
But there is another, less terrifying scenario. By leaving the euro, Greece would lose its bailout money ? but it would also regain control over its economic future. By returning to its own currency, Athens could depreciate its way to better competitiveness, something the country simply can't do as part of the euro zone. Rather than suffering under German-imposed reforms and retrenchment, Greece could press forward with a drastic restructuring of its national debt, a step the leaders of the euro zone have been anxious to avoid. None of this means the process won't be painful ? Greeks will have to endure years of austerity measures and reform whatever currency they use. But departing the euro zone might at the same time give the country a better shot at halting its economic free fall and returning to healthy growth, at least in a more reasonable period of time.
And the euro zone might gain from a Greek exit as well. Those tens of billions thrown at Greece in bailouts could then be redirected to recapitalize banks, shore up Italy and Spain and protect the core of the monetary union. How would global financial markets react? Hard to predict. The exodus of a country from the euro zone would be unprecedented and destabilizing. But then again, Greece's exit would not be surprising to anyone who hasn't been stranded on a South Pacific isle for the past two years. That suggests the impact might not be as dramatic as many fear, especially if Europe acts fast to back up its banks and defend the remaining euro zone member states. (See why there is no joy in Greece over the E.U. deal.)
In many ways, Greece is like a contestant on the old game show Let's Make a Deal. The country has a choice of two doors ? one that leads it out of the euro and on its own; one that keeps it a part of Europe and its great experiment in integration. We can only guess what is behind those doors, and there is no way of knowing for certain which door is best to open. Greece could end up with a shiny new Cadillac. Or a year's supply of canned tuna. It's not a choice I'd want to make. I wish them luck.
See the details of Europe's new debt-crisis agreement.
See TIME's photo-essay "Outrage in Athens."
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