May 15th, 2012
10:33 AM ET

Doomsday scenario for the eurozone?

Editor's Note: The following text is from GlobalPost, which provides views — importantmoving or just odd — from around the world.

By Paul Ames, GlobalPost

It was the scenario never to be named — a prospect so terrible that the mere mention of it would conjure up doom and destruction for the eurozone.

In the last few days, however, the risk that Greece could be forced out of the currency bloc has become too real to be ignored. The once-taboo subject has become an unavoidable topic of conversation among Europe’s financial leadership.

“The price would be very high if they decided to leave the euro,” warned German Finance Minister Wolfgang Schauble before talks Monday with his eurozone partners.

Governors of three central banks have openly raised the option of a Greek exit.

“Technically, it could be managed,” said Patrick Honohan, the Irish governor. “It is not necessarily fatal, but it is not attractive.”

Even Jose Manuel Barroso, the usually cautious president of the European Commission, had a stark warning for the Greeks: “If a member of a club does not respect the rules of the club, it’s better not to remain in the club,” he told Italy’s Tg24 TV last week.

In the corridors of the European Union’s headquarters, the fear now is not only that Greece could be forced out, but that the resultant chaos would spread quickly to Portugal, Ireland, Spain and beyond, causing a collapse of the euro currency and a generalized economic meltdown.

The prospect has more than just Europe worried. For all its problems, the eurozone’s $13.6 trillion economy remains the world’s second largest. Its collapse would risk a global economic earthquake making Lehman Brothers look like a mild tremor.

“This is not just about Europe. There is a possibility that it may spread to the global economy,” Japanese Prime Minister Yoshihiko Noda told Dow Jones Newswires over the weekend. “This is the biggest downside risk factor for the Japanese economy.”

The doomsday scenario is not yet inevitable, but unless European leaders get their response right, the dominoes could start to fall very quickly.

Greece could be forced into a rerun of its inconclusive May 6 election in mid-June. Polls predict an even stronger showing for the mishmash of Trotskyites, neo-Nazis and other anti-austerity groups whose surge in support triggered the current impasse.

They want Greece to renege on commitments to cut its huge budget deficit in exchange for the 130 billion euro bailout. Germany and other creditors have warned that would lead to a freezing of bailout payments. A bankrupt Greece would then be forced to drop out of the eurozone.

As that prospect draws near, savers facing the threat of exchanging their euros for a much weaker new national currency could spark a run on the banks and send their money to Germany or some other safe haven. Some reports suggest that Greeks have already transferred 250 billion euro out of the country.

Renewed fears over Greece are already having a major impact on other at-risk countries. Portugal’s stock index hit its lowest level since 1996 on Monday, and Italy and Spain both saw rates on their bonds rise to the highest levels this year.

If Greece heads towards a euro exit, creditors would send those rates soaring, casting doubt on the nations’ ability to pay their debts. Savers in Portugal, Ireland and Spain could also take fright and move their money abroad. Shaky banks would implode. G8 economies Italy and France would come under threat.

Saving the euro, at that point, would need a massive intervention by the European Central Bank, backed by increased firewall funding from Germany and other more stable northern European nations. An agreement to share debt burdens or devalue the euro might also be required.

It is by no means certain, however, that skeptical voters in Germany, the Netherlands and Austria would go along with that. The incoming Socialist administration in France and restless political parties in Italy could also rebel against austerity measures, which the northerners are likely to insist upon as part of a new financing deal.

Ireland could rule itself out of any future EU bailouts if its austerity-weary voters reject the EU’s fiscal discipline treaty in a May 31 referendum.

As eurozone finance ministers gathered in Brussels on Monday evening, officials were acknowledging that the risk of a Greek exit — they are calling it the "grexit" — is now as great as at any time since the crisis erupted in late 2009.

But Jean Claude Juncker, the Luxembourg prime minister who chaired Monday's meeting, insisted that other EU members were not seeking to push Greece out.

"Nobody was mentioning an exit of Greece from the euro area (in the ministerial meeting). I am strongly against," Juncker said in a news conference. "I don't envisage, not even for one second, Greece leaving the euro area. This is nonsense. This is propaganda."

Given that most Greeks say they want to keep the euro, European leaders are hoping they will return to mainstream politicians if there is a second election in June.

For that to happen, leaders in other European countries might have to take a gamble and intervene directly in the election campaign by making it clear that the vote will be, in effect, a referendum on staying in the eurozone.

"Without a Greek commitment, this (bailout fund) won't work, and this is the responsibility of Greek politicians," said Olli Rehn, the EU's economics commissioner, after the ministers' meeting. "The future of Greece and the welfare of its citizens lie more than ever on the shoulders of Greek politicians."

There is a risk that more foreign lecturing to the Greeks could backfire if voters rebel against yet more outside interference, but the EU is rapidly running out of options if it wants to keep the eurozone together.

Topics: Europe • Greece

soundoff (88 Responses)
  1. mike

    "The future of Greece and the welfare of its citizens lie more than ever on the shoulders of Greek politicians." Actually, it's on the shoulders of the Greek people, to vote in politicians that have a clue. Of course, that would require the Greek people to have a clue, which, from all accounts, they don't.

    May 16, 2012 at 1:26 pm | Reply
  2. Asturiano

    Looks like George Bush gave the Greeks lessons on national budgets and deficits.

    May 16, 2012 at 1:35 pm | Reply
    • MG.

      ....considering that Obumbles added more to the national debt than the last 3 presidents combined ($5 trillion in less than 3 years), I'd say that your full of it! ...you can look these facts up at the "federalbudget" site!

      May 17, 2012 at 1:42 am | Reply
    • Megan Grawe

      Austuriano; The Democrats flat out own the two most expensive gov'ts in the history of humanity! In first place, the all Democrat controlled 111th congress and Obama blew away 8 years of G.W.Bush in their first 19 months in office for spending according to the CBO and the Treasury. Coming in at a very distant second was the all Democrat controlled 110th congress in Bush's last two years in office! ...M.G. is correct you're full of it! ...LOL

      May 17, 2012 at 2:17 am | Reply
  3. Davi Marriott

    With Obama spending like a drunken sailor, the U.S. will end up like Greece! Obama is literally the most expensive leader in world history with no signs of him letting up on the spending! ...Anyone But Obama (ABO)

    May 17, 2012 at 2:24 am | Reply
  4. blucorsair

    With Obama and the Democrats in control we now have runaway food and fuel prices, coupled with a devalued dollar and down graded bonds! ....sounds like Greece to me!

    May 17, 2012 at 2:31 am | Reply
  5. dm3006

    The Dims will never admit that socialism doesn't work and they'll never stop even if it takes every dime you've got! ......and america is just about out of dimes!

    May 17, 2012 at 5:43 am | Reply
  6. christianchildbeaters

    Greece can't sell its goods to Germany and other EZ partners because it cannot devalue its currency becasue it must use Euros of the same value as other EZ nations. Therefore nobody will buy its products because they are too expensive. Greece cannot simply reduce its prices because it costs more to produce the same item than it costs Germany and most other EZ countries. Therefore its export base of manufactured and most agricultural products is destroyed. What I would say to the hacks on CNN is – WAKE UP, STUPID! For the van Rompuy cretin to talk of 'obeying rules' is a public admission of the willful ignorance and pettiness of the little men who have criminally seized control of Europe. Before you write any more drivel on CNN, go on YouTube and watch the videos of Nigel Farage MEP – this will give you something of the truth to take to your readers.

    May 17, 2012 at 6:46 am | Reply
  7. psmith

    The Euro never made any sense for reasons which are clearly evident now. If Greece was not in the union it could devalue its currency and raise money by selling their exports cheaply in the world market. The same goes for Spain, Portugal, stc. In order to have a "United States of Europe" Europeans not only need to unite their Central Banks but also their 17 Governments. This is not likely> Europe is not and will never be United like the US because they are not one country but 17. It might be painfull in the in the short run but the better obtion in the long run. These are crazy times.

    June 13, 2012 at 8:03 pm | Reply
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