Fears of a Greek default and withdrawal from the eurozone grew larger Thursday night as the International Monetary Fund pulled out of cash-for-fiscal reforms talks with Greece's leadership.
"This…is the IMF holding the gun to [Greek Prime Minister] Alexis Tsipras's head," the Guardian's economic editor, Larry Elliott, wrote in a column titled "Do you feel lucky, punk?" about the IMF's withdrawal.
"It feels like a pivotal moment, the point where the creditors are saying 'take it or leave it' and the Greeks have to decide whether the IMF really means it," Elliott wrote.
Greece must make a deal by June 30 with its troika of creditors, which in addition to the IMF includes the European Central Bank and European Commission, or face default on billions of euros in loans meant to shore up its economy. If a compromise is not reached, the danger exists that Greece could exit the eurozone and return to its old currency, the drachma, and in the process become the first country to leave the monetary union. Such a move would roil international financial markets and call into question the viability of the continental economic and political union.
Since the left-wing party SYRIZA gained power in January, its supporters worldwide have wondered why the nation hasn't backed out of the Eurozone already, as doing so would relieve its obligation to obey austerity mandates from its creditors and the ability to devalue its own currency, consequently making it easier for outside investors to do business.
Indeed, the party has internally debated whether to split from the Eurozone or come to a deal with its creditors that will still allow the country to roll back measures that saw wages and retiree benefits cut. The party's biggest critic on its left, the Communist Party of Greece, insists not just on a split from the euro, but from the European Union entirely, a position most often associated with right-wing nationalist parties like Britain's UKIP.
Countries like Argentina and Iceland have mitigated their respective debt crises through currency devaluation, which allows for firms to create inflation that lowers real wages, and as Columbia University economist Jon Steinsson tells VICE News, "the country becomes more competitive, the cost of producing goods in that country falls, so it's more likely that Greek firms will be able to sell their products."
But Greece's radical leaders don't appear to have considered this extreme option until now. And while Greek protesters have made it clear that they are fed up with austerity mandates dictated from their creditors, they haven't clearly demanded a pullout from the Eurozone. Why not?
Part of the reason, as Steinsson explained, is that devaluation of the currency means that wage earners will become poorer, so while they might be unburdened with the Eurogroup's austerity demands, they will suffer economically nonetheless. While that could also make it easier to hire unemployed people, he said, it would come at the cost of real wages for workers with higher wages, which could infuriate unions.
But it's also a logistical nightmare, since returning to the drachma "entails violating contracts, since contracts are written in euros," Steinsson said. The Greek government could re-write those contracts, he said, but noted, "that's a very brutal operation to do, it violates property rights."
And as the current Greek finance minister, Yanis Varoufakis, explained in a talk in Zagreb, Croatia in 2013, since Greece simply doesn't have a physical currency to devalue, it would have to go through the process of replacing everyone's banknotes. He said, "it's a recipe for having all wealth liquidated and leave the country."
An Argentina-style default is also impossible, he said, because in that case, the country had tracts of land that Chinese firms wanted to buy in order to plant soy. Greece, he noted, doesn't have a situation like that to ensure speedy, outside cash injections at a time when it would need them.
Greece leaving the Eurozone also carries a political hazard: It means a European Union member state is taking one foot out of the continental government, just as the parliament has freshly seated a new crop of nationalistic euroskeptics, and as a re-elected Tory government in the United Kingdom vows to hold a referendum on its future in the EU in the next few years.
The EU, Steinsson said, is historically responsible for modernizing countries like Greece and Spain, which were closed off by fascist dictatorships after World War II.
"The European Union has been a very powerful force in terms of improving institutions in southern Europe," Steinsson said. "The EU helped transition those countries to democracies. There's a worry that all that will go backwards."
And SYRIZA doesn't exist in a vacuum. It has alliances with leftist parties throughout Europe that are dedicated to ending austerity elsewhere, such as with Podemos in Spain and Die Linke in Germany. The political turn against austerity is a European project, and could be addressed in an international forum, like the EU.
For Steinsson, getting Greece and its creditors to meet in the middle is the preferred outcome.
"That seems like a much more reasonable position," he said. "If they can strike a much better deal, then that's a vastly much better deal than an exit."
Follow Ari Paul on Twitter: @aripaul