A Greek default is not the same as quitting the euro. A common misconception links the two together. But a default is both likely and desirable, provided it is orderly. Bringing back the drachma is neither. Not only would it be bad for Greece, it would be the culmination of a major row within the euro zone and trigger a more virulent phase of the crisis.
Athens’ debt load will be unsupportable even after the half-hearted default agreed in late July. Greece keeps veering off the plan that it has agreed with its saviours, the euro zone and the International Monetary Fund. Tension is rising at home, international relations are being soured and markets’ nerves are perpetually frayed. Cutting the debt substantially would help put Greece on the road to recovery. Even Germany, once dead set against any euro zone default before 2013, seems to be coming around to the idea.
It is vital that such a default should be orderly. That means it should be part of a new agreed program, which would continue to provide cash to Greece in return for commitments to stick with its reforms. It also means that Germany, France and others might have to pump money into their own banks to deal with the fallout. But forcing the banks to own up to their foolish lending would be a good thing.
But default doesn't mean abandoning the euro. Although Greece should never have joined the single currency, kicking it out would create havoc. There's no provision for an exit, much less for an ouster, meaning that it could only happen as a result of an almighty diplomatic row. The default would then be a disorderly one, leading to a collapse of the Greek banking system. That wouldn't just hammer the economy at home; the contagion throughout the rest of the euro zone would be severe, with the danger of domino collapses of other banking systems.
A properly planned default would be cathartic. Exit from the euro would be the opposite.