Don’t downplay likely fallout after Greek exit from euro

mkhalili/flickr

Riot police keeping protesters back from the parliament building at a rally in Athens, September 27, 2011.

Article Highlights

  • Greece's exit from the euro would lead to real contagion for the rest of the European periphery

    Tweet This

  • Greece would be defaulting on $450bn of sovereign debt--the largest in history

    Tweet This

  • European policymakers would be gravely mistaken to underestimate the fallout of a Greek default

    Tweet This

Sir, Lex’s suggestion (“Discomfort zone”, December 30) that an orderly Greek exit from the euro should be manageable because Greece constitutes only 2 per cent of the overall eurozone economy is all too reminiscent of the policy complacency that preceded the Lehman bankruptcy in September 2008.

One has to reckon that Greece’s exit from the euro would lead to real contagion for the rest of the European periphery and that could precipitate a European banking crisis. It would do so in much the same way as the widely anticipated collapse of Lehman, a supposedly relatively small US bank, triggered contagion throughout the global financial system.

It is not simply that Greece would be defaulting on about $450bn of sovereign debt, which would make it the largest sovereign debt default in history. Rather, it is that the lie would have been given to the repeated assurances by European policymakers that no eurozone country would either default or exit the euro.

Especially against the backdrop of widespread Greek bankruptcies and runs on the Greek banks, one has to anticipate that there would be similar bank runs and the drying-up of external funding to the banks in Ireland, Portugal, Spain and Italy. This would throw into question the serviceability of these countries’ sovereign debts worth more than $4.5tn.

Lex is almost certainly right in suggesting that a Greek exit from the euro is both almost inevitable and the preferred course of policy action. However, it would be a grave mistake for European policymakers to underestimate the fallout from such an occurrence.

Desmond Lachman is a resident fellow at AEI

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

What's new on AEI

image Dad and the diploma: The difference fathers make for college graduation
image A better way to finance that college degree
image Fracking for bigger budgets
image Earth Day: Hail fossil fuels, energy of the future
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.