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Beware of Greeks Bearing Debt

The situation in Greece is so bad – with sovereign debt at 150% of GDP and economic growth forecasts continuing to fall – that economists and foreign policy thinkers are scrambling to think through the implications of default. What would happen if a bankrupt Greece dropped the euro? Ian Bremmer at the Financial Times explains why he thinks it unlikely Greece will have the desire or ability to leave:

If Greece were to leaves the eurozone, sovereign default would also be accompanied by corporate default. Shutting down the country’s banks will be complex, costly and contagious. Also, Greece is a democracy. This makes things even messier.[…]

Worse, Greece has a mountain of debt denominated in euros. A switch to a new drachma would not change this. In fact, the drachma’s devaluation would only make the debt that remains that much harder to pay off.

Any limited competitive advantage gained by euro exit (and devaluation) would not hold for long. And that wouldn’t be the end of it. Post-exit, the rest of the eurozone and EU would punish Greece by imposing tariffs, while Greece would also lose EU structural funds.

Just as important, the rest of Europe has little reason to approve EU/euro treaty amendments that would allow Greece to ditch them:

Why would Portugal or Ireland let Greece go, shifting the savage market spotlight to themselves? More importantly, why would Germany agree? German exports — the lifeblood of the eurozone — would decline as a result of the currency appreciation precipitated by a Greek exit. On a broader level, if Greece left the eurozone, it would set a very dangerous political and economic precedent for other debt-ridden countries — Italy in particular.

With some careful forethought the worst of these consequences could be mitigated; an orderly departure from the eurozone might ultimately be less expensive and present fewer legal problems than a long and painful struggle ending with a demoralized and politically shredded Greece in flight from a burdensome currency union and impossible creditor demands.  But whether the goal is to keep Greece in or ease Greece out, Europe is going to have to move faster and more intelligently than anything we’ve seen so far.

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  • Alex Scipio

    There seems an assumption that Greece would ask for permission to leave. Greece’s total failure to abide by the debt-GDP obligations of the EU treaty would rather seem to indicate that she’ll do whatever she wants.

  • Corlyss

    Let us all now praise famously preening NGOs like the EU and the UN. They are going to save us all, it says here in the mission statements.

  • Sturt

    I can’t see how Bremmer gets to his conclusions – he’s overdramatizing the worst case scenario. The EU Customs Union is separate from the monetary union, so they wouldn’t reimpose tariffs on Greece’s separate currency. And regional funds are also separately determined. If you wanted to GUARANTEE a chain of contagion, then yes, the EU countries should try to undermine Greece’s chances of success outside the Euro. But if Greece exiting the Euro is the only step to limit German and French bondholders’ losses, they will get there, but only after trying everything else first.

  • rvastar

    “The best way to destroy the capitalist system is to debauch the currency.” – Vladimir Lenin

    Mission (almost) accomplished.

  • Peter

    Mr. Mead this four minute clip is one of the best analyses on the Greek problem I’ve seen.

    It shows why Greece can’t prosper — and actually never did. It’s standard of living has always been artifically high due to massive infusion of outside money that the Greeks would never have to pay back.

    Germany & France were fools to allow Greece into their club as a full member, and now they’re going to have to pay big bucks to throw the freeloader out.

    The video clip is from from Startfor.

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