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Greece Eurozone Exit Would Be Felt Worldwide

Greece Eurozone Exit Would Be Felt Worldwidei
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May 31, 2012
Greeks head to the polls again later this month to cast votes for a new government that could ultimately decide whether Greece remains in the eurozone. The parliamentary elections, the second in as many months, became necessary after the country's fractured political parties were unable to form a working coalition. European member states, once fearful of panicking financial markets, have begun making contingency plans for a possible Greek exit. But at what cost? As Mil Arcega reports, despite its small size, what happens in Greece could have an oversized impact on the global economy.

Greece Eurozone Exit Would Be Felt Worldwide

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Greeks head to the polls again later this month to cast votes for a new government that could ultimately decide whether Greece remains in the eurozone.  The parliamentary elections, the second in as many months, became necessary after the country's fractured political parties were unable to form a working coalition.  European member states, once fearful of panicking financial markets, have begun making contingency plans for a possible Greek exit.  But at what cost?  Despite its small size, what happens in Greece could have an oversized impact on the global economy.

With a population just under 11 million, and an annual GDP of about $300 billion, Greece is ranked 41st in a list of the world's industrialized countries.  But with a sovereign debt nearly double its annual output, Greece is one of the weakest links in what has become a protracted European crisis.  

Simon Johnson is an economist at the Peterson Institute for International Economics.

"The European Union is more than a quarter of the world's output and they have brought upon themselves and mismanaged a very serious crisis, so I'm afraid the implications for many countries are going to be quite dire," said Johnson.

Many see Greek elections in June as a referendum on the tough austerity measures demanded by the European Union in exchange for bailouts.  But it's a referendum that could result in Greece becoming the first to leave the eurozone.

Analysts say a messy divorce could lead to higher borrowing costs for weaker economies, plunging countries such as Spain and Italy deeper into recession.

The financial ripples could reach across the Atlantic, shaving as much as one percent off U.S. growth.  Enough, says economics professor Peter Morici, to halt an already tepid U.S. recovery.

"We are only growing at about 2 percent a year right now," said Morici. "If we took another half a point off that, we're getting down to a level that can't be sustained.  The economy could likely tumble into a recession."

Despite its minimal exposure to Greece, analysts say the threat of a double dip recession in the world's largest economy would be enough to roil already shaky financial markets.
 
Banks with greater exposure to European debt could see a run on deposits - some would face outright collapse.
 
Even faster growing economies in Asia can expect sharp declines as exports to the West dry up.
 
Ironically, Morici says Greece would be better off with a carefully managed exit from the monetary union.  But he doesn't think that will happen.

"I expect the Greeks to elect the government that will keep them in the eurozone, and that they will implement the austerity program and that Greece will continue to cycle downward," he said. "This time next year, we'll be talking about 25 percent unemployment in Greece, much more than 50 percent youth unemployment, young professionals leaving the country and Greece slipping into developing country status."

Europe's Central Bank chief Mario Draghihas acknowledged the severity of the crisis, describing Europe's present course as "unsustainable."  But even as he calls for urgent reforms - others insist Europe's experiment in a common currency has failed - pointing to Greece as an example of why it has not worked.

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