Thank you Chairman Kirk, Ranking Member Heitkamp, and members of the Subcommittee for affording me the great honor of testifying before you today. My name is Desmond Lachman and I am a Resident Fellow at the American Enterprise Institute. I am here in my personal capacity and I am not here to represent the AEI’s view.
Introduction
Recent economic and political developments in Greece suggest that it is only matter of time before that country both defaults on its large public debt and imposes capital controls. Those developments could very well pave the way for Greece’s exit from the Euro within the next twelve months. Were that to occur, one must expect that Greece’s economic and political crisis will deepen, which could lead to that country becoming a failed state.
Europe is in a very much better position today than it was in 2012 to handle the immediate fallout from a Greek exit. However, a number of countries in the European economic periphery continue to experience weak economic growth at a time that they still have very high public and private sector debt levels. This makes them especially vulnerable to swings in investor sentiment once global liquidity conditions are normalized and once the perception becomes widespread that Euro membership is no longer irrevocable.
The implications of a Greek default for the United States are not to be underestimated. Immediate action by the European Central Bank (ECB) to limit contagion to the rest of the European periphery must be expected to further significantly weaken the Euro against the dollar that could have a material impact on the US trade balance. From a longer term perspective, should market financing for a country as highly indebted as Italy dry-up in the wake of a Greek exit, one should expect renewed tensions in global financial markets that could constitute a significant headwind to the US economic recovery. In addition, were Greece to become a failed state, a geopolitical price might be paid in the sense that Russia would have an opportunity to gain a firmer foothold in the Balkans.
A deepening of Greece’s economic and political crisis would further dent the credibility of the IMF, which has provided major financial support to Greece over the past five years and which has consistently underestimated the depth of the Greek economic depression.. It could also result in Greece’s defaulting on the US$24 billion it owes to the IMF, which could have implications for the US taxpayer.
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