A “Grexit” may be the fair thing, but it may not be the right thing. It may be cutting off the nose of Greece to spite Europe’s face.
From “The Fairness Trap,” James Surowiecki, The New Yorker:
“This [a Grexit] isn’t an outcome that anyone wants. Even though a devalued currency would make Greece’s exports cheaper and attract tourists, it would do so at a terrible price, destroying huge amounts of wealth and seriously harming the country’s G.D.P. It would be costly for the rest of Europe, too. Greece owes almost half a trillion euros, and containing the damage would likely require the recapitalization of banks, continent-wide deposit insurance (to prevent bank runs), and more aid to Portugal, Spain, and Italy…. That’s a very high price to pay for getting rid of Greece, and much more expensive than letting it stay.
“Rationally, then, this standoff should end with a compromise — relaxing some austerity measures, and giving Greece a little more aid and time to reform. And we may still end up there. But the catch is that Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair. German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay. They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform. But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration. The grievances aren’t unreasonable, on either side, but the focus on fairness, by making it harder to reach any kind of agreement at all, could prove disastrous.
“The basic problem is that we care so much about fairness that we are often willing to sacrifice economic well-being to enforce it.
“You can see this in the way the U. S. has dealt with the foreclosure crisis. Plenty of economists recommended giving mortgage relief to underwater homeowners, but that has not happened on any meaningful scale, in part because so many voters see it as unfair to those who are still obediently paying their mortgages. Mortgage relief would almost certainly have helped all homeowners, not just underwater ones — by limiting the spillover impact of foreclosures on house price — but, still, the idea that some people would be getting something for nothing irritated voters.
“The fairness problem is exacerbated by the fact that our definitions of what counts as fair typically reflects…a ‘self-serving bias.’ You’d think that the Greeks’ resentment of austerity might be attenuated by the recognition of how much money Germany has already paid and how much damage was done by rampant Greek tax dodging. Or Germans might acknowledge that their devotion to low inflation makes it much harder for struggling economies like Greece to start growing again. Indeed, the self-serving bias leads us to define fairness in ways that redound to our benefit, and to discount information that might conflict with our perspective. This effect is even more pronounced when bargainers don’t feel that they pare part of the same community — a phenomenon that psychologists call ‘social distance.’ The pervasive rhetoric that frames the conflict in terms of national stereotypes — hardworking, frugal Germans versus frivolous, corrupt Greeks, or tightfisted, imperialistic Germans versus freewheeling, independent Greeks — makes it all the more difficult to reach a reasonable compromise.
“From the perspective of society as a whole, concern with fairness has all kinds of benefits: it limits exploitation, promotes meritocracy, and motivates workers. But in a negotiation where neither side can have what it really wants, and where the least bad solution is as good as it gets, worrying too much about fairness can be suicidal. To move Europe away from the brink, voters and politicians on all sides need to stop asking themselves what’s fair and start asking themselves what’s possible.” Emphasis added.