Last Updated Apr 30, 2010 11:38 AM EDT
For the past decade, Europeans have treated doomsayers of the euro like a batty uncle that lives in a deserted wing of the house and gets wheeled out on ceremonial occasions. So crazy he is sometimes amusing, but his yammering grates so much that, after a time, you wheel him back in.
When the euro celebrated its tenth anniversary in 2008, I was on hand for the celebrations in Frankfurt, home to the office tower of European Central Bank and a big mockup of the euro symbol. When they played Beethoven's Ode to Joy, Europe's anthem, the crowd assembled in the city's elegant opera house stood in a spontaneous show of pride and respect.
The euro has been a "remarkable success," the ECB's president, Jean-Claude Trichet, crowed at one point.
This weekend, many of the people who were present at the Frankfurt opera house that day are feverishly hammering out the details of a rescue package for Greece that will be in the neighborhood of $120 billion, maybe more.
The cradle of western civilization now faces the quandary that it cannot devalue its currency, which is run out of Frankfurt. Under other circumstance a devaluation would help restore a country's economic equilibrium. Exports would become more competitive, tax receipts would rise, and its effective debt burden would shrink, since payoffs would come in the form of a cheaper currency.
So why not just ditch the euro and return to the drachma?
The counter-argument always highlighted the costs of doing so. Euro-denominated debt would become expensive to service. Creditors would cut you off, peeved at the sudden shift. Debt markets would close. And so on.
But the financial crisis has changed the game, and to understand why, you have to wrap your head around the concept of the marginal cost to Greece of dumping the euro. That cost has fallen dramatically in the past year or so, and especially in the last few weeks.
Think of it this way:
When I'm greeted by exultant but dirty and snot-nosed kids (I have two) the moment I enter the front door, the marginal cost varies. If I'm wearing a suit, the marginal cost of a big, hugging greeting is kinda high (dry cleaning ...), but if I've been working outside and already dirty myself, I don't incur any cost I didn't already reckon with.
So it is with Greece. These are not tranquil times that you risk disturbing by abandoning the euro. Creditors appear like wolves at the door, default seems entirely possible, the streets of Athens are awash with often violent demonstrations. Why not take your destiny into your own hands and make a conscious decision to go back to the drachma?
If that happened, the problems would spread to other eurozone countries unless Europe's grown-ups stage a dramatic intervention that would run into the many hundreds of billions of euros.
If Greece gets away from the euro and the world does not end, then other countries get tempted -- Spain, Italy, Portugal and Ireland all have similar issues -- to go the same route. Even if they don't, financial markets see the temptation to do so is great, and raise the cost of borrowing for these countries. The dynamic that got Greece accelerates.
Greece's crisis is the euro's, and the euro's crisis is yours too if you sell anything in the 16 countries that use the embattled currency.
Image via Flickr user Harry Lime , CC 2.0