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A deal between Greece and its creditors would be best. But if there has to be a Grexit, here is how to do itJul 11th 2015

IN A crisis studded with missed deadlines, Sunday July 12th really could mark the denouement of the Greek debt drama. The leaders of the euro zone along with those of all the EU’s 28 member countries will gather for a set of meetings in Brussels. If Alexis Tsipras, Greece’s prime minister, can strike a deal with his creditors that day, his country will stay afloat inside the euro. If there is no such deal, Greece is heading inexorably towards the whirlpool of Grexit. Donald Tusk, the president of the European Council—a Pole not prone to hyperbole—calls it “the most critical moment in the history of the EU”.

All sides insist that their aim is not to eject Greece from the euro, but rather to find a way to keep it in. But the more honest European politicians admit that the likelihood of Grexit has never been higher. Betting now puts it at around 50%. Shockingly, for something so imminent, probable and with such dramatic consequences, there has been remarkably little public debate about how Greece would leave the euro. The best outcome for Europe would still be a deal on July 12th that keeps Greece in. But it is also time to make contingency plans for the sort of Grexit that does the least harm.

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Tsipras rows, again

In principle, a deal between Greece and its creditors should not be hard. The reforms Mr Tsipras promises are tantalisingly close to those demanded by the other euro-zone countries and the IMF. No one, from Angela Merkel, Germany’s chancellor, to Mario Draghi, the president of the European Central Bank (ECB), wants to be held responsible for pushing the Greeks out. The need for debt relief, the totemic issue for Mr Tsipras, is underscored by the IMF, and—privately, at least—acknowledged by most European politicians who can count. Rational self-interest should also push both sides towards a deal. Grexit will hit Greece’s economy harder than staying in and it will cost the creditors a lot more money. If it leaves the euro, Greece will not just default on its loans from European governments but also its liabilities to the ECB. The total—€340 billion ($375 billion) or more than 3% of euro-zone GDP—is far more than the relief needed to make Greece’s debt burden sustainable.

But rational actors would never have got this far. The Greek government’s erratic behaviour—it arrived at a last-ditch meeting this week with old, handwritten proposals—and its inflammatory statements have generated the sort of ill-will that can make small obstacles insurmountable. Germany’s attitude towards debt repayment has its roots in moralising sermons and an obsession with rules rather than economic self-interest. Political constraints bind, too. Mr Tsipras cannot shout defiance in Athens one week, and roll over in Brussels the next. If northern European taxpayers voted on whether to hand money to Greece without conditions, they would vote No, too. For all these reasons, the meeting on July 12th could well fail.

What then? Greece will probably drift towards Grexit by default. Banks will stay closed. One member of the ECB governing council has said emergency liquidity will be cut off on July 13th. Without cash to pay wages and pensions, the Greek government will have to issue IOUs, which will quickly become an informal parallel currency, trading at a huge discount. From essential medicines to energy, there will be shortages of vital imports. A new currency will be introduced amid chaos.

Some of that chaos can be avoided, but doing so will demand forward planning and generosity from the creditors, two virtues that have been in short supply. One task is to clarify the legal uncertainties. (Is Greece permanently out of the euro or just temporarily issuing IOUs? Can it remain in the EU if it is not in the euro?) The second is to ensure that an exiting Greece has both the policies to stabilise its economy and avoid high inflation and the cash to pay for critical imports.

Pulled by the current

Some Europeans suggest the legal tangles of Grexit can be avoided by pretending that Greece is not actually leaving. Wolfgang Schäuble, Germany’s finance minister, has spoken of a “temporary” Grexit. If the Europeans allowed the Greeks to issue scrip or temporarily to introduce an emergency parallel “currency”, Greece might in effect suspend its membership of the single currency without technically leaving (see article). Such a non-Grexit exit would allow European politicians to put off pesky problems such as how to deal with the losses on the ECB’s balance-sheet. Technically, it could also be reversed if Greece struck a deal with its creditors at a later date.

This halfway house might buy time, but it cannot be a permanent solution. And the longer Greece lives with such a dual currency, the less likely it is to return to the euro. But even if the door to the euro zone closes, other doors need not. Greece should be allowed to stay in the EU. Domestic support for Mr Tsipras since his election in January has been animated above all by a sense that Greece’s dignity has been trampled upon. The humiliation of Grexit would be compounded if Greece found itself cast out of the wider union as well. EU law is woolly on the subject, but preserving easy access to European markets for Greek exporters and visa-free access to Greece for European holidaymakers would be a huge boost to the post-lapsarian Greek economy. It would also enable EU funds for poorer regions to keep flowing and help prevent Greece from becoming a failed state on the EU’s flank.

To maximise its chances, Greece would need to match a euro exit with budget discipline and an independent central bank credibly targeting low inflation. Europe should provide humanitarian aid and balance-of-payments support for the fledgling drachma. This could either be direct (just as the EU helps Ukraine) or more creative—for instance, euro-zone states could put themselves at the back of the queue of Greece’s creditors, helping the country tap private markets again.

The irony is that the new lending and debt-forbearance by Europe needed to prevent Grexit from causing a catastrophe are the elements needed to keep Greece in the euro. Equally, a sundered Greece would have to resort to much the same austerity it is resisting. That is all the more reason for both sides to cut a deal. But it is no excuse to put off planning for the worst.