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Three ways Greece could bring down Europe #EuroMess

at 03:06 PM ET, 11/02/2011

It’s hard to find an economist with a good solution to the
George Papandreou (AP)
unfolding debt crisis in Europe. “You’re choosing between very difficult alternatives,” says the London School of Economics’ Kevin Featherstone. “There are no good options left.” What’s not hard, however, is finding an expert who can rattle off the many ways that the Greek debt crisis could end up damaging the European Union. Here are three potential doomsday scenarios to worry about in the coming months:

1. Greece leaves the European Union and the euro. The possibility of Greece’s departure from the euro has been a concern ever since prime minister George Papandreou called for a referendum on the European Union’s bailout package. If the referendum fails — as many observers think it could — that would almost inevitably push Greece out of the continent’s common currency.

Greece’s exit from the euro would mean it defaults on about $500 billion in public loans. That’s bad news for European countries heavily invested in Greece, such as Germany, and it will put additional pressure on Italy and Portugal, which also have struggled financially. Greece probably doesn’t end up in a great situation either. While the country would be absolved of much of its debt, a new, standalone currency comes with huge problems of its own. “It would wreck the financial system entirely and, unless Greece got help from Europe and other partners, it would make it very difficult for the Greek state to pay pensions,” says the Center for European Foreign Relation’s Thomas Klau.

2. The Greek government dissolves and defaults. Right now, Papandreou’s socialist party has a razor-thin, two-person majority in the 300-person Greek parliament. Economists worry that even before a referendum takes place, Papandreou could lose his majority, and the Greek government would collapse. That, explains the American Enterprise Institute’s Desmond Lachman, would likely lead to a very messy and disorderly default, even before a referendum takes place.

“Greece is on life support right now, with the International Monetary Fund and European Union subjecting it to jumping through a variety of hoops,” says Lachman, a former IMF deputy director himself. “If you have a period of instability, a month of two of campaigning against the IMF, how can they possibly say the government is on the right track? If the government falls, then the International Monetary Fund is going to have trouble still writing the country a check.”

3. Greece’s instability dissolves the confidence of other European nations. Even without an election, and before a possible referendum, Greece’s fragile, political situation could undermine eurozone confidence. Signs of this are already cropping up: German papers, for example, are reporting that the country’s banking association will not move forward on a bailout deal until a Greek referendum is held, and the votes are in. But perhaps the biggest sign of sagging confidence comes from the markets: across the world, exchanges have tumbled as they lose confidence in the European Union’s ability to respond to a daunting crisis.

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