Sometimes a country becomes so overridden by debt that it actually makes sense for it to default, abandon its currency and start over. Greece is not one of those countries.

That hasn't stopped a number of economists from arguing otherwise, however, and Prime Minister Alexis Tsipras's statement that he may call a referendum on any deal with creditors suggests Greeks might soon be asked to make a choice. If they are, they should trust their instincts (insofar as they can be measured by opinion polls) and stick with the euro.

It isn't that default or leaving a currency union is unthinkable. Far from it: The Hellenic peninsula was home to the first recorded default in the fourth century B.C., and modern Greece has reneged on its debts four times since gaining independence in 1829. Worldwide, more than 70 countries have exited currency unions and pegs since 1945, not all of them painfully.

The argument for Greece to go it alone has always been superficially attractive. For one thing, it should never have joined the euro in the first place, because it couldn't meet the European Union's debt-limit requirements. And the standard way for overextended countries to reboot their economies is to devalue their currencies, increase their exports and start growing again. So long as it's in the euro zone, Greece can't do this.

The likely outcome of a return to the drachma would be more misery for Greece. While some defaults lead to recovery, often after a short period of pain, others haven't been successful or quick. In Greece, the combination of poor governance and a falling currency has tended to produce inflation rather than sustainable growth. There's little reason to believe this has changed.

Greece still has a relatively small tradable sector to create export-led growth -- mainly tourism, shipping and agriculture. So the potential benefits of a devalued currency are limited. Greece needs a new business model.

Another hurdle to a successful devaluation is that the country has already undergone so much economic depression. One projection says that a default and return to the drachma would lead to only a 10 percent loss of gross domestic product. That sounds manageable -- until you realize that Greece has already lost more than a quarter of its economy since the start of the current crisis. Another 10 percent could bring about a political and economic meltdown.

David Fuller's view

All of this is debatable, although I find somewhat more to agree than disagree with in Bloomberg’s article.  More importantly, EU officials seem determined to keep Greece in the Eurozone, as I discussed yesterday.  Fair enough, although I doubt this will work for either Greece or the EU for very long, unless it moves away from a confederation of governments and adopts a Federal system similar to what one sees in the USA.

I believe ECB President Mario Draghi would favour this but see little enthusiasm for a European Federal system in Germany or across the EU region.  Ancient nations with different histories and languages are unlikely to give up their sovereignty easily, not least as their centuries-long histories include periods of considerable animosity.  This is quite different from the diversified groups of immigrants who eventually formed the USA. 

Therefore, perhaps the more practical step for a group of European nations which wish to form a powerful trade block capable of remaining a global power is to concentrate on robust economic reform.  We have yet to see this within the EU to any significant extent, but better late than never.