Study finds that a Grexit from the eurozone would be economically bearable – but if it caused a domino effect leading others to leave the single currency the situation would run out of control
Greece's future in the eurozone is still vague. International creditors are not willing to take final decisions before the report of the troika is on hand. If the assessment of the country's reform performance should be negative it might follow that foreign lenders suspend their financial support. In that case Greece would suffer sovereign default. In order to be able to pay government employees and other entitlements, the Greek government would have to introduce a new national currency and thus leave the eurozone. This development – sovereign default and introduction of a new currency – could be the starting point for a deep global economic crisis. This is the conclusion of a study carried out by Prognos AG on behalf of the German Bertelsmann Stiftung.
The described scenario of a Grexit would have severe economic and social consequences for the country itself: a massive devaluation of the new Greek currency, rising unemployment, sharply declining domestic demand and more. In Greece alone, the ensuing losses of growth, measured by real gross domestic product, would amount to €164bn or €14,300 per capita over a period from 2013 to 2020. In countries outside Greece the sovereign default would result in large-scale write-offs, both for government budgets and private debtors. Hence public expenditures on goods and services would decline as well as private consumption and investment. The volume of production and employment would diminish. Nevertheless, for other countries the economic consequences of a Grexit would be economically bearable.
However it is by no means guaranteed that Greece's exit from the euro would not trigger a disastrous domino effect. A Grexit might translate into a loss of investors' confidence in Portuguese, Spanish and Italian capital markets. In that case rising interest rates could sooner or later provoke sovereign defaults in these European Union members, too. Such domino effects would have much more far-reaching economic consequences. The group of countries affected would not be restricted to Europe, but also include the United States, China and other emerging countries. If Greece, Portugal and Spain fell bankrupt, declines in growth in Germany would increase to €850bn by 2020. In the US, it would mean a loss of growth to the extent of €1.2 trillion and in the 42 of the most important industrial and emerging countries worldwide it would result in losses amounting to €7.9 trillion.
In the worst case, if the euro crisis were to reach the point where Italy had to secede from the eurozone, too, the situation would run completely out of control. This scenario would eventually lead to severe international recession and global economic crisis. By 2020, growth losses in the 42 countries analysed by the study would reach a total of €17.2 trillion. In absolute terms, France would suffer from the highest losses at this point of €2.9 trillion followed by the USA, China, and Germany.
What are the political implications of these model calculations? At first glance a sovereign default of Greece and a Greek exit from the eurozone seem to have only minor economic effects on the world economy. But taking a closer look, a Grexit could spur capital market speculations inducing sovereign defaults in Portugal, Spain and finally in Italy. And this in turn would send the world economy into a deep recession that would heavily affect not only Europe, but the rest of the world as well. Apart from the fierce economic consequences of such a worldwide recession, such a worst case scenario would also put major strains on the social fabric and political stability of a number of states. Apparently, this would particulary apply to the countries that would have to leave the eurozone. But other states would feel dramatic strains, too.
Even if there were only a comparatively small risk that a Grexit might turn into an economic, political and social wildfire spreading all over Europe and beyond, this risk still ought to be sufficient to expect the international community of states – not only the European ones – to make all efforts to keep Greece in the eurozone.
Thomas Fischer and Thieß Petersen work out of the German Bertelsmann Stiftung. The report Economic impact of Southern European member states exiting the eurozone can be found here