The immediate threat comes from political turmoil in Greece and the increased prospect that it will leave the euro zone rather than carry out a tough austerity program rejected by Greek voters in elections last week. The fear is that a Greek exit could undermine the confidence of global investors in other struggling European countries such as Spain and Italy, raising the prospect that these major economies could default if they do not get an international bailout.
The impact of Greece leaving the euro zone could be grave not just for Europe but also for the United States, prompting a downturn in trade that would hurt U.S. companies and roiling global stock and credit markets.
The world economy is already in fragile state, with the U.S. recovery still anemic, many European countries in or near recession and growth slowing in other major economies such as China.
Heading into the Group of Eight summit, hosted by President Obama, officials from outside the euro area are worried whether emergency measures taken over the past years by European leaders — including hefty bailout funds and inexpensive loans to struggling banks — are adequate. A recent surge in the cost that Spain and Italy have to pay to borrow money shows that investors are worried also.
“They’ve got a long way to go, a very difficult set of challenges, and they just need to make sure that they can convince the world that they’re going to manage these challenges,” U.S. Treasury Secretary Timothy F. Geithner said at a forum in Washington on Tuesday. “We have a big stake in the managing.”
In Britain and Canada, G-8 members whose governments have been among the euro zone’s harshest critics, the alarm bells were ringing.
British Prime Minister David Cameron said in Parliament on Wednesday that the euro region was “looking at potential breakup” because of Greece’s political paralysis and differences among countries over the best economic policy. “That’s the choice they have to make, and it is a choice they cannot long put off,” he said.
Britain’s central bank chief spoke of a “storm” heading toward the country, which is not part of the euro currency union.
The leaders from Germany, France and Italy — the three euro-zone countries in the G-8 — will be in the hot seat at the summit, at the Camp David presidential retreat in western Maryland. That is a position those countries’ leaders have often been in since Greece’s problems began unfolding in late 2009.
Two of the leaders are relative newcomers with much left to prove. Italian Prime Minister Mario Monti took office in November and, while given credit for taking a tougher line on government spending, has yet to win parliamentary approval for broader labor and regulatory policy changes considered central to boosting growth. Newly elected French President Francois Hollande
wants more emphasis on economic growth but could face skepticism at the meeting if he proposes to do that by increasing government debt.