The Costs of Greece Leaving the Euro Could Be Very High
The prospect of Europe's debt crisis spilling over to the United States is threatening
May 16, 2012
It is hard to imagine that the economic crisis in small country like Greece that is just over 2 percent of the Eurozone's gross domestic product is generating shock waves big enough to destabilize the region. Today, politicians, pundits and the public in Europe are talking about the possibility of Greece leaving the euro and returning to the drachma.
What seemed like an inconceivable idea just a few months ago, today seems almost inevitable, but the costs of Greece leaving the euro could be very high.
"The spillover effects, the chain of consequences that could result from that [Greek euro exit] are very difficult to assess," Christine Lagarde, Managing Director of the International Monetary Fund told the press. "We can certainly assume that it would be quite messy."
Continued economic and political turmoil in Greece is generating great market volatility, wreaking havoc in bond markets and continuing to weaken growth prospects in the region. Greece's exit from the Euro could exacerbate these trends increasing the potential need for further bailouts for Spain for example.
The prospect of Europe's deepening sovereign debt crisis spilling over to the United States through exchange rates, trade and financial channels is also threatening.
Greece's continued failure to implement the harsh austerity measures imposed upon it by its creditors is making it hard for the creditors to continue to provide support. But Greece's non-compliance with this austerity agenda should not come as a surprise—the agenda was never politically or socially viable in Greece in the first place.
But where to from here? Europe and the Greeks themselves have to decide whether the costs of the bailouts are a worthy trade-off against Greece's inevitably messy withdrawal from the Eurozone.