NEW YORK (TheStreet) -- Should Greece leave the eurozone?
Former French president Valery Giscard d'Estaing thinks so. In an interview this week, he suggested that Greece's economy can't thrive with such a strong currency and that its problems aren't just about its debt, which is the focus of the current crisis gripping the nation of 11 million.
Others seem to think that Greece needs to impose flows on capital to keep funds locked up within the country. Still, others argue that the Greek voters elected the current government to express their will that Greece doesn't want to continue with the austerity programs that were begun by the previously elected government to satisfy the wishes of the European Union.
The real problem for Greece and the future of the European Union isn't the country's debt or the euro or even that Greece's fate is tethered so closely to the wishes of the leadership in Germany and Brussels -- it's that you can't have it all. Let me explain.
Greece is a classic example of the issues elucidated by the Economic Trilemma.
The Trilemma contends that a country can achieve only two of the following three things: a fixed exchange rate; a free international flow of capital; and an independent economics policy, generally stated in terms of an independent monetary policy. Greece is trying to have all three.
First, being a member of the eurozone means that Greece is subject to a fixed exchange rate. That is the essence of the currency union. Second, Europe has prospered because it has allowed a free flow of capital through international markets. The free flow of capital internationally has been a major elements in modern global economic advancement. Third, Greece is trying to decouple its economic policy from that of Germany and the other member states by not adhering to the general rules of the eurozone. It's Greece's desire for an independent economic policy that could be the undoing of the European Union.
First option: Giscard d'Estaing, the former French president, has suggested that Greece needs to work with a weaker currency. If Greece left the currency union to work with its own currency while it gets its act together, it would also have access international flows of capital. It would be able to follow the wishes of its citizens who elected the new government and would be able to pursue its own independent economic policies. Under that scenario, Greece would leave the currency union until it was able to re-apply for membership again.
Second option: If capital flows were stopped, then Greece could continue with a fixed exchange rate because it would still be a member of the currency union and could continue to conduct an independent economic policy. It could then reform itself and bring itself up to the standards set by the members of the European Union. If that were accomplished, it could then open up capital markets and be a fully participating member. The question here is whether Greece could reform itself and perform well economically if international capital were not available.
Third option: This is the difficult one for the European Union: To let Greece stay in the eurozone, continue to give it access to international capital but allow it to set its own economic policy. The European Union is working to eventually become a political union, which is one reason that it sets standards and requires member nations to meet those standards. Maintaining the standards is the reason Germany and other members are taking such a hard line against the current Greek government.
If the members of the eurozone allow that kind of freedom of choice to be the standard of conduct within the union, then the European Union won't survive. If every nation within the eurozone can decide that it doesn't like what is going on within the body and can vote to follow a different path and do whatever it wants, then there really is no European Union.
The single currency, right now, is the driving force behind the formation, execution and future of the European Union, and the free flow of capital internationally is a necessary reality of the modern global economy.
The political union is the only thing that is missing from this picture and has been one of the major problem areas experienced by the European Union over the years, especially during the past four or five years. The failure to achieve a political union may be the one thing that keeps the eurozone from achieving its full potential.
This current battle may be a major stepping stone to what might be achieved in the future. That is something Yanis Varoufakis, the Greek finance minister, should be able to explain as an economist and as an alleged game theory expert. Perhaps his gamesmanship has taken into account the true stakes of the negotiations: the future of the European Union.
This article is commentary by an independent contributor.