Many believe that Greek Prime Minister Alexis Tsipras was responding to an ultimatum from his European partners: Accept our demands or leave the euro. The question is why a Greek exit from the euro (‘Grexit’) amounted to such a potent threat.

In fact, from an economic perspective, Grexit no longer represents the potential catastrophe that it once did. After all, the main short-term cost – financial-system disruption – has already materialised in Greece: banks and the stock market have been shut down, and capital controls have been imposed. While those actions were needed to stem large-scale capital flight and prevent the banking system’s collapse, they also caused the Greek economy to contract sharply.

 

In this context, Greek negotiators might have considered another proposal, circulated informally by the German finance ministry, recommending that Greece receive immediate debt forgiveness, in exchange for leaving the euro temporarily. If Greece remained in the euro, no relief would be granted – a proviso consistent with the German position that debt restructuring for eurozone countries would be illegal. While the legal argument is probably spurious, an outright debt reduction for a eurozone country remains politically impossible.

 

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Whatever Schäuble’s reasons, his proposal could have represented a way out for Greece, whose economy had been squeezed dry by austerity and whose banking system was already closed. Immediate debt reduction and the recovery of economic sovereignty –even at the expense of exiting the euro, at least temporarily – would seem to have offered significant long-term benefits. In a sense, it amounted to a golden opportunity, with Germany offering to pay for something that many believe Greece should be doing anyway.

 

Nonetheless, the Greek government rejected an exit, and instead accepted the creditors’ tough terms. This suggests that, during the negotiations, Greece’s leaders were driven by more than economics. Perhaps, contrary to popular belief, countries’ political attachment to Europe via the euro remains very strong, even where, as in Greece, people have endured unprecedented hardship since joining the monetary union.

 

The monetary union’s rationale, as many have noted, was always more political than economic. For precisely that reason, it may well be too early to write off the single currency.