A few days ago, I suggested a novel solution to the Greek debt crisis: Greece should leave the EU and form some sort of federation with Turkey. The proposal was satirical, but like many provocative ideas, contains a kernel of truth. Assuming that literally becoming a part of Turkey is politically impossible, what might a constructive arrangement between the two countries actually look like?
To begin with, let me state my assumption: staying in the Eurozone is bad for Greece. This does not mean that the current negotiations for a bailout and haircut should end, but they should be accompanied by elaboration of a plan for an orderly exit from the euro. So long as it is in the Eurozone, Greece cannot grow. Grexit is necessary.
But if it were to leave the Eurozone, what currency could Greece use? Returning to the drachma will no doubt be accompanied by a massive loss of purchasing power. The international bond markets are unlikely to have much faith in Greece's ability to manage its own currency, given its inability to collect taxes and produce workable budgets. Greece's government simply has no credibility, which unfortunately means that Greek citizens pay the price. Under such conditions, uniting with Turkey in a currency union based on the Turkish lira may not be a crazy idea. Ankara is more credible than Athens. It is true that per capita income in Turkey is currently about half of that in Greece. But the Turkish economy is growing and Greece's is headed in the opposite direction. Greece's nominal income, as we have seen, is distorted because of its denomination in euros. The actual economic conditions for production in Greece are arguably closer to those in Turkey than they are in Germany. And tying Greece to the lira would help the country direct its economy southward and east, toward the Middle East, rather than toward the European markets in which it is uncompetitive.
The crisis has already led to previously unthinkable proposals for cooperation between the two old enemies. Recently a Turkish MP suggested that Turkey could pay some of the Greek debt. Of course, taking on the entire amount of Greece's accumulated debt is another story, particularly as the Turkish economy suffers fallout from the turmoil of the Middle East. It is hard to see why Turkey would take on the task of paying off European taxpayers who are the ultimate creditors of Greece. But it is surely worth exploring whether the two economies might together form a more optimally sized currency union than the current one Greece is stuck in.
History has many examples of former enemies coming together when conditions change. Perhaps today's crisis offers a similar opportunity for Turkey and Greece.