It is all too easy for us in the United States to dismiss the Greek economic crisis as something happening to a very small country on a distant shore that is of no great concern to us. However, to do so would be a big mistake, since an intensification in the Greek crisis could send ripples across the global financial system that could materially affect our economy. Of equal concern, it could allow the Russians to gain a firm foothold in the Balkans that would be to our geopolitical disadvantage.
The basic reason that Greece now demands our attention is that the country is well on its way to exiting the euro. Negotiations with its International Monetary Fund and European Union creditors on a financial support program have broken down irreparably, while the European Central Bank is refusing to provide Greek banks with additional financial support. This has forced Greece to declare a bank holiday for a whole week and it will soon force the country to default on its IMF and European Central Bank loans.
It is not helping matters that the Greek government is now planning on holding a referendum on July 5 on whether or not Greece should accept the final bailout offer by its official creditors. The fact that Alexis Tsipras, the Greek prime minister, is throwing his weight behind a no vote in that referendum is hardly likely to improve his government’s very poor relations with its creditors.
The Greek economy is in no position to take yet another body blow from renewed financial and political turmoil. The country is already mired in an economic depression on the scale of that experienced in the United States in the 1930s, while its treasury is running out of money to pay wages and pensions. It would seem to be only a matter of time before the Greek government is forced to start settling its obligations by issuing IOUs rather than by paying with cash.
Sadly, it is all too likely that Greece is now headed for a major financial crisis that will see it exit the euro before year-end. If that were to happen, at a minimum we should brace ourselves for a further sharp appreciation in the U.S. dollar that could have a significant impact on our exports. The dollar would rise as European investors sought the safety of U.S. Treasuries and as the European Central Bank was forced to take measures to prevent Greek contagion from spreading to other troubled European countries such as Italy, Portugal and Spain.
European policymakers are taking comfort in the fact that Europe is in a very much better position today than it was in 2012 to weather the impact of a Greek exit. After all, they now have in place a 500 billion euro European Stability Mechanism to deal with such an eventuality as well as a European Central Bank that is committed to do “whatever it takes” to stabilize the euro.
While European policymakers appear to be well-equipped to handle the immediate fallout from a Greek exit, they do not appear to be so well positioned to deal with the longer-run damage that a Greek exit might cause to the euro project. A Greek exit would signal very clearly to markets that euro membership was no longer irrevocable. If the crisis did spread to the larger European countries, the United States economy could be seriously impacted by the deep trade and financial links that we have to Europe.
Heightening the longer-run risks of a Greek exit on the rest of the European periphery is the fact that Italy, Portugal and Spain are all now characterized by significantly higher levels of public debt than in 2012. It also has to be of concern that these countries remain characterized by very low economic growth, which makes it very difficult for them to grow their way out from under their debt mountains. Not helping matters is the fact that all the countries in the European economic periphery are now experiencing political backlashes against further budget austerity and structural economic reform.
Should a Greek exit lead both to a souring of European-Greek relations and to the further erosion of Greek political stability, one could see a failed Greek state increasingly coming into the Russian orbit. Already the Syriza government has been actively engaged with Moscow about the construction of a Russian gas-pipeline through Greece despite the U.S. administration’s objections. A deepening of the Greek economic crisis is all too likely to bring Athens and Moscow closer together.
Hopefully something will turn up and Europe will be able to solve its Greek problem without that country leaving the euro. However, U.S. policymakers would be making a grave error to premise their policy decisions on such hope. Rather, they should now start giving serious thought as to how the United States might be affected by a worst-case Greek scenario.
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