Grexit? Spexit? Let's Call the Whole Thing Off

One thing we've learned as the euro crisis has unfolded is that the enthusiasm of experts in London and New York for offering advice to the struggling countries on Europe's periphery is matched only by their passion for awkward neologisms. The world was just getting used to "Grexit" (Get it? A Greek exit from the euro!) when "Spexit" began to rear its ugly head in the financial press.

Naturally, the events of recent days have brought Spain back to the forefront of the debt crisis, generating insecurity about the reliability of the official fiscal deficit numbers, the validity of central bank statistics, and new numbers showing capital flight reaching alarming levels. Only this week, Spain announced that the central bank governor, Miguel Angel Fernandez Ordoñez, will be leaving early as part of a government effort to restore its credibility. Some are now anticipating that Spain's exit from the eurozone will come before Greece's departure.

I would hope that those clamoring for these countries to go their own way are at least better intentioned than they are informed, since normally they exhibit a singular lack of understanding about how political systems in southern and eastern Europe actually work.

It is now essentially conventional wisdom in the British and American press that Greece needs to return to the drachma. British journalists are even racing to hunt down the London printing works that have supposedly been given the contract to print New Drachmas, the putative local replacement for the euro. The only snag is, according to all opinion polls, the Greeks themselves are not happy with the euro but have no interest in dropping it. (Perhaps the perfect Solomonic solution here would be to have the New Drachma introduced as a non-convertible currency for use only within Fleet Street bars and the boundaries of the City of London.)

The Greeks, naturally, are tired of austerity, and of a stupid EU/IMF bailout plan that has only served to totally collapse their economy, explode their debt, and destroy what semblance of external reputation Greek companies had. The Greeks are tired of austerity in the way many in the United States have tired of fiscal stimulus in the run-up to the next presidential election. But no one would suggest that this weariness is an indication that Americans want to drop the dollar.

As an economist, I have always argued that the common currency was a mistake. I am a "euro" skeptic, but not a "Euroskeptic," and I think it important that people outside Europe understand that this distinction exists. There is no doubt that the euro, like Dr. Stangelove's doomsday machine, is an infernal device destined to blow up one day, but also so designed that any attempt to dismantle it simply detonates the bomb. This is why, tired as they may be, those who live on Europe's southern fringe have little appetite for leaving or taking part in yet another experimental new currency order. Better put, they have little appetite for leaving in a disorderly fashion. And disorderly the leaving would have to be, since if core Europe has little appetite for assuming the cost of keeping the eurozone together, it will surely have even less for paying the much larger bill associated with exit and default.

The media's increasing scrutiny of Spain is similarly misguided. Despite the many voices now recommending a "Spexit," few are really knowledgeable about daily life here in Spain, and even fewer are actually to be found inside the country.

The story of how Spain got to this point is well-known. There was a huge property bubble (could we say the mother of all of them?), a decade of above-EU-average inflation, a massive loss of competitiveness, a huge current account deficit, and an unprecedented stock of external debt. All of this now needs to be unwound, but here's the rub: It is very easy to structurally distort an economy within the framework of a currency union, but very difficult to correct the distortions once generated. This is why so many rightly say that in Spain it is all pain as far ahead as the eye can see. It is not that the Spanish people like this, but just that they don't see any clear and better alternative. And indeed, while only 37 percent of Spaniards believe having the euro is a good thing, according to a recent Pew poll, 60 percent favor keeping it.

The departure of Ordoñez, the central banker, may seem more dramatic from the outside than it does from within. Certainly Mafo, as he is called, bears a heavy responsibility for Spain's continual failure to get a grip on the rot in its financial system, and for the disastrous decision to allow the insolvent Bankia conglomerate to go to IPO last year, losing shareholders more than $2 billion and badly damaging the credibility of the country's banking sector. But his is only one name on what should be a very long list of putative villains, including members of the present government, the previous one, the EU Commission, the European Central Bank (ECB), and last but not least the IMF, where ex-Bank of Spain deputy director Jose Viñals has been busying himself for months writing reports suggesting the condition of Spain's banks was not all that bad.

The real question is what happens next. Spain, like the euro itself, is both too big to rescue and too big to fail. Spain's banks need capital from the government, but the government itself can't finance them. Foreign investors are leaving in droves, but no matter how many liquidity offers they get from the ECB, the country's banks simply can't buy all the debt. So the country needs European (read: German) money. The problem is that if this takes the form of an injection of bank equity, then Germany could end up all but owning Spain's banks, which would expose German taxpayers to considerable potential losses should the situation deteriorate further. At this point Berlin could firmly put its foot down, and we will have another impasse.

At the end of June, Europe will face what many consider to be a perfect storm: results of the Greek elections and details of the new, independent, Spanish bank valuations, which are sure to find that significantly more money will be needed for recapitalization. This will undoubtedly be a make-or-break moment in the ongoing debt crisis, and, if things were to spiral hopelessly out of control, a Spexit could become a real possibility. My advice to all those external well-wishers would be: Be careful what you ask for, since you might not like what you finally get.

This article originally appeared in the magazine Foreign Policy.