Issue of the week: What a ‘Grexit’ would bring

last updated 8 January 2015

So this is how the euro ends, said Simon Johnson and Peter Boone in HuffingtonPost.com. European officials, nervous about whether Greek voters will elect anti-austerity parties on June 17, are openly planning for a “Grexit”—Greece’s exit from the euro. Some finance ministers even welcome the idea as offering a fresh start to the debt-wracked country, but they’re ignoring the strong likelihood that Greece’s default will set off the “chaotic dissolution of the euro zone.” A Grexit would prove once and for all “that the euro is not forever,” said Martin Wolf in the Financial Times. It would cause interest rates to explode in other vulnerable countries like Portugal, Italy, and Spain, torpedoing already shaky austerity efforts there. The “doom loop” could quickly spread to Europe as a whole, resulting in incalculable worldwide fallout every bit as bad as that caused by the 2008 collapse of Lehman Brothers.

“Can we all take a deep breath now?” said Thomas Oatley and Kindred Winecoff in ForeignPolicy.com. “Greece is not Lehman Brothers,” and the world will be just fine if it exits the common currency. Think of Argentina after it dropped its dollar peg in 2002. Yes, banks failed and the country’s recession initially worsened, but Argentina’s woes mostly stayed in Argentina and the economy staged a remarkable comeback. Even if Greece’s troubles spilled into other euro zone countries, the situation would most resemble the 1997 East Asian crisis—a big deal in the region, to be sure, but a “temporary blip everywhere else.” Once the smoke clears, a Grexit could even be “one of the best things that ever happened” to the euro zone, said Jacob Kirkegaard in Bloomberg.com. It might finally compel the remaining countries to agree to deeper financial integration and the “quantum leap” in bank supervision that the euro direly needs to survive.

We simply don’t know how the dominoes might fall, said Michael Sivy in Time.com. We can debate how devastating the likely scenarios might be, but the situation could easily deteriorate in unpredictable ways, just as it did in 2008. We still don’t have a handle on how big the global derivatives market is, and an unforeseen meltdown there could have “world-shaking” financial effects. “About the only sure thing is that there will be” unwelcome surprises, said David Wessel in The Wall Street Journal, and the U.S. won’t be immune to them. Just keep your “fingers crossed.”