Robert J. Samuelson: Global economy can handle Greek crisis

Greece is a mess. The banks are shut; withdrawals from ATMs are strictly limited. A referendum will determine whether or not Greece accepts tough conditions for receiving further financial aid. It looks (and is) grim. Global stock markets are rattled. But don’t be fooled. Whatever happens to Greece, the fallout for the rest of Europe and the world economy is probably modest. It’s conceivable that the Greek turmoil will lead to a Lehman Brothers II – a global financial panic – but the odds are against it.

There are three main reasons for this. In written testimony last week for the Senate Banking Committee, four economists outlined them.

First, Greece’s economy is tiny, about 1.8 percent of the entire eurozone (the 19 countries using the euro), according to Jacob Kirkegaard of the Peterson Institute. This means that even if Greece’s economy sinks further – almost a certainty – the lost exports for other countries will be small. All American exports to Greece amount to a few thousandths of 1 percent of the U.S. economy (gross domestic product), Kirkegaard noted. Even Germany’s exports to Greece total only 0.2 percent of its GDP.

Second, the danger of “contagion” – the spreading of the crisis through losses to banks and investors – has diminished. Contagion is more likely when a crisis “takes investors and government by surprise,” testified Harvard’s Carmen Reinhart. “There is no surprise here.” Precisely. Greece’s problems are no secret. Precautions have been taken. In 2010, most Greek government debt was held by banks and private investors. That’s no longer true. Banks and investors have absorbed losses or been bailed out by the European Central Bank (ECB), International Monetary Fund (IMF) and other eurozone countries. These lenders now hold about 85 percent of Greece’s debt.

Third, Europe is better prepared to handle a crisis now than earlier, said Desmond Lachman of the American Enterprise Institute. If Greece defaults, other countries with high debts and weak economies – say, Portugal or Italy – might find it harder to borrow. To counter this possibility, Europe now has the European Stability Mechanism, which could lend vulnerable countries 500 billion euros (about $560 billion). In addition, the ECB has indicated that it would lend aggressively to protect the euro from panics and bank runs.

None of this means Greece’s plight will be painless for outsiders. As Lachman noted, if the ECB mounts a defense of the euro, the currency could experience a “significant further depreciation.” A cheaper euro would in turn hurt U.S. exporters. In addition to lower global stock prices, there could also be higher interest rates. Still, most of the pain will be felt by the 11 million Greeks.

From its peak, Greece’s GDP has already dropped more than 25 percent. Unemployment is hovering around 25 percent. For youths (25 and under), the rate is roughly 50 percent. Aside from deposit withdrawals, the banking system is plagued with widespread loan delinquencies, according to Reinhart. Against this desperate backdrop, Greeks face a lose-lose choice: Accept the creditors’ tough terms, and the economy gets worse; or replace the euro with its own currency, the drachma – and the economy gets worse.

Reviving the drachma without “laws or precedents for how to convert all payment flows, assets and liabilities” from euros would create chaos in Greece, testified Dartmouth’s Matthew Slaughter. Consumption and business investment spending would plunge, with “double-digit declines … conceivable.” How much social unrest this might produce is a harder question.

Adopting the euro was supposed to be an irrevocable commitment. It was a political statement that a continental Europe is bigger and more important than any of its member nations. Once a country drops out, that premise is shattered. A Greek exit would raise the possibility that other countries in the same situation – high debts and nonexistent or dismal economic growth – would suffer the same fate.