The dissolution of Czechoslovakia shows Grexit need not be traumatic

Jonathan Lindsell, 23 June 2015

Following the demise of communist rule in the bloodless Velvet Revolution of 1989, tension within federal Czechoslovakia grew between Czechs and Slovaks. Both saw the rise of nationalist parties which came to a head when President Václav Havel stood for re-election unopposed, but was blocked by Slovak deputies in their chamber of parliament. The Slovak parliament declared its independence on 17 July and negotiations produced a formal split to take effect on 1 January 1993.

Compared to the potential Greek exit from the euro, this ‘Velvet Divorce’ was remarkably complicated. The nations were still in the lengthy process of disengaging from the communist bloc, including the Warsaw Pact’s economic and political bodies. The nations shared not only their currency (the Czechoslovak koruna) but political institutions, a nominal border, national symbols, an army, transport infrastructure, gold reserves, and citizenship. Peaceful dissolution was achieved without major economic disruption, despite fewer than 50% of either nation supporting it. Sporting cooperation and bilingual broadcasts continue atop modern EU initiatives.

There are similarities with the Greek-eurozone situation, however. Czech GDP per capita was higher than Slovakia’s, but Slovak growth was expected to be faster in the long run. Czechs were more in control of the Prague-based federal government. Nationals from each worked and lived in the other nation.

The similarities should not be overstretched, but the dissolution at least suggests modern European break-ups can be conducted without serious antipathy, given a degree of mutual understanding and cooperation. There are already blueprints for this from the 2012 Wolfson Economics Prize.

Continuation of the current Greek situation helps nobody and contributes to international resentment and tension, as did the unbalanced Czechoslovak federation. Continued or additional austerity is very unlikely to produce the kind of growth Greece needs to pay off its debts or improve its citizens’ quality of life. Even the IMF and European Central Bank conceding the current round to Alexis Tsipras will only prolong the pain, as more repayments loom through the summer that Syriza will struggle to repay. Leaving the euro is not inevitable, but looks likely.

We know Finland has been preparing for Grexit already. It is important that, if Grexit is to happen, both sides forget their recent grievances and consider how to conduct an orderly currency introduction to benefit both economies. Iceland proved that defaulting and rebuilding could work for a small country, but with the help of IMF and Nordic loans, neither of which will be so easily offered to Greece. For the stability of the remaining euro countries, and to ensure their trading partner soon returns to health though, some manner of rescue loan should certainly be offered, safe in the knowledge that with a sovereign currency, Greece would be able to repay.

While the Czechs retain the koruna, the Slovak Republic adopted the euro in 2009. They sit at the table where Greece’s future will be debated, and should communicate their experience of velvet divorce to the larger powers. They know separations do not need to be disasters.

Jonathan Lindsell is EU research fellow at Civitas. He is currently investigating different options for a two speed Europe.