The Euro Crisis and Why It Should Matter to You, Part III – Contagion

As finance ministers and heads of state from across Europe continue to meet in tense rooms across the continent, all hoping to find some way to bring back Greece from the brink and save the Euro and possibly the community as it exits today, the drama of it all remains quite distant to too many. So what if Greece crumbles and reverts back to the drachma? What does it really matter if the Greek government place more importance on their own electoral future than actually instituting the reforms necessary to guarantee the funds needed to keep the country afloat? Why should I care if the EU sees fit to let one of their own drift away? In a word, contagion.

With an economy that is dwarfed in size with its EU neighbors and a level of individual debt that is unlikely to cause too much worry among its many creditors, Greece could probably collapse without much effect were it to exist in a vacuum. But it doesn’t. For Americans, this would individually mean a likely loss of the $6.2 billion US banks currently have on the books from Greece. Hardly an amount to dismiss but compared with the rest of Europe, its likely manageable. However, should the country be allowed to fail, a few things would likely happen, not least a significant loss of confidence in the stability of the Euro and really the European Union project. If they would allow Greece to fail in the face of the first real stress test of the new economy, who would be next? Would all eyes turn to the next in line? Would that loss of confidence spur sell-offs and quick exits from economies already struggling to put their affairs back in order? Spain is already reeling from daunting unemployment rates (nearly 23 percent) and the dismal news that their economy shrank 0.3 percent in the last quarter of 2011, so what would happen if the country’s remaining strength was sapped as investors far and wide ran for the exits? And Ireland? Or Portugal?

For now, many are looking to Italy for the effects of contagion, not least because Italy’s standing as the world’s 7th largest economy and one of the EU’s most important makes it all the more frightening to imagine it moving into a position where borrowing becomes a crippling handicap. Its already moved into that territory more times than anyone is comfortable, giving the world a glimpse of what a regional slowdown or collapse would look like.

So, what would it mean for those outside of the community? For Americans at least, it would mean the kind of stress on US lending institutions that the country’s slow recovery would not prefer to see. If Greece defaults, it may only mean $6.2 billion but looking down the road, there is Italy with its $34.8 billion, Spain with $49.6 billion, Ireland with $39.8 billion and just for the cherry on top, Portugal with its $3.9 billion. Sure, this is a doomsday scenario but taken together, the effect could be lightening fast and disastrous. Short of creating the kind of fire walls German seems to be having so much difficulty in putting into action, the contagion could be quick and deadly, putting the brakes on any US recovery.

The symptoms are widespread and difficult to address, especially with government officials from Athens to Berlin unwilling to budge in either direction, but ultimately the consequences will be for us all. I’d like to think I can hit on all the relevant points about why this all matters beyond Europe but I would like to point to a far more useful and informative resource; the recent edition of This American Life which sidestepped the pleasant story telling last week and turned the whole hour over the Planet Money team to provide a superb rundown of how it all began and how it could end.

Image: Globedia

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