The Grexit that Could Actually Happen

February 1, 2016 3:00 PM

For years the euro area has labored to successfully prevent a financial exit by Greece from the common currency, a fear commonly known as "Grexit." Following the September 2015 elections, Greece now has a parliament that is overwhelmingly pro-euro and in compliance with the program imposed by the European Commission, the European Central Bank, and the International Monetary Fund (IMF), known as the Troika. Barring major external economic and political shocks, the country can return to growth in 2016 and get further debt relief from the euro area. The migration crisis in Europe threatens this hopeful forecast and could even force a de facto "physical Grexit" from the rest of Europe.

Last week the European Commission started a bureaucratic doomsday clock threatening Greece with expulsion from the Schengen Area of open borders if it does not manage its border with Turkey more effectively. The legal basis for such an expulsion would be the conclusion of the so-called Schengen Evaluation Report of Greece [PDF], based on unannounced inspections to verify compliance with its rules for identification and registration of migrants at the Turkish-Greek border in late 2015.

The draft report has not been made public, but EU Migration and Home Affairs Commissioner Dimitris Avramopoulos has described "serious deficiencies in the management of the external border in Greece." Unless Greece implements in the next three months whatever remedial measures the Commission and Schengen Evaluation Committee propose,1 a qualified majority of Schengen members (e.g. , able to outvote Greece) may reintroduce physical internal border control to protect the common interest of the Schengen Area and hence leave Greece out for up to two years.

Ironically, Greece doesn't actually have a land border with any other member of the Schengen Area, as none of its northern and eastern neighbors, Albania, Macedonia, Bulgaria, or Turkey, are Schengen members. So the immediate effects would mostly be felt at Greek international ferry connections and airports.

Making the confrontation more likely, EU political leaders are under increasing political pressure to reestablish control over Europe's external borders and dramatically limit the number of migrants. They are looking for ways to close Europe's borders physically, because no one expects the problem to subside by itself.2

Greece's economic crisis of recent years was a product of its own domestic dysfunction, but a migration-driven Grexit would be a travesty for which Greece should not bear all the blame. Greece has received little or no support from other Schengen members, who expect it to achieve the impossible. Without coercive measures incompatible with European conventions and values, Greece cannot close its maritime Aegean Sea border with Turkey to hundreds of small migrant boats. Unlike the euro crisis, the migration crisis is beyond Greece's control. It is Europe that has failed to help Greece or accept anywhere near the number of migrants agreed under the European Union's relocation scheme.

The French and German governments have an incentive to solve this problem well before their next election cycle in 2017. Failure would strengthen various anti-immigrant parties, giving them a chance to gain real governing influence in Paris and Berlin, and indeed throughout the European Union. Reinstating full national border controls (e.g., controls that will prevent thousands of determined migrants from crossing the border), effectively repealing the Schengen Area, would be politically costly for France and Germany, on the other hand. They may favor a new, more defensible common external border. Since closing the Aegean Sea border is not realistic under the current EU migration framework, European leaders may look to reestablish the most suitable land border. The external Schengen Area border to the southeast runs along the Slovenian, Hungarian, Slovak, and Polish borders, with European Union members Croatia, Bulgaria, and Romania, together with the rest of the former Yugoslav republics and Albania, between the Schengen Area and Greece. So where to draw the line?

The erection of new borders would aggravate Greece's problems as migrants continue to stream in, knowing they would likely be better off there than in their countries of origin. With its northern border sealed, Greece's ability to cope with a flood of migrants would undermine its efforts to reform its economy. Outrage within Greece could plausibly spark a popular revolt, breaking off relations with the rest of the European Union and even renouncing the debt owed to the rest of the euro area. After all, is it worth laboring for decades to repay partners who won't even let you travel freely to their countries? Such a development would quickly revive the ghosts of Grexit worries past and impose dramatic economic and financial costs on both Greece and the rest of the euro area.

Another path forward exists. First, there must be a recognition that migration issues cannot be separated from Greece's economic reform program overseen by the Troika. Europe should make the next round of debt relief conditioned on full cooperation by the Greek government to manage the migrant inflow. The IMF should also threaten to walk away from the Troika if the border is not kept open. But second, Europe must drop its hands-off approach, and individual countries—or at least willing nations—should collaborate more closely on migration issues to maintain Europe's internal mobility and open Schengen borders and manage its external borders.

Last December, I proposed the formation of a European Migration and Mobility Union (MMU) among willing EU member states. The plan recognizes that external border control and rules governing national migration policy must shift to the common European level. Far more money should be set aside for these purposes. But there is no reason why a committed Greece could not join an MMU and remain financially and physically in Europe.

Notes

1. These proposals will be published on February 2.

2. The latest data from UNHCR [ZIP] show that during January-November 2015, only 38 percent of all new asylum applications in the EU-28 originated from Syria and Iraq. Over the course of this period though, their share rose from 22 percent in January 2015 to 54 percent in November 2015.