Anxiety Accelerates Over Europe and Greece

Greece’s Exit More Symbolically Dangerous.

The small Mediterranean country of Greece has been more than a thorn in Europe’s (NYSEARCA:VGK) back for the past eighteen months; it has been the focal point of foreign press on Europe, and in this case all press is not necessarily good press.  To truly understand the scope of the Greek debt crisis, one must analyze the Greek economy and its overall importance to the Euro.  As ever more countries bid to enter the Euro, now Greece appears to bid for an exit, the first ever in the Euro’s history.  A Greek exit from the Euro has been likened to a worse event than the collapse of the Lehman Group (1), but international pundits, or self-proclaimed pundits, typically tend to overstate matters for attention (and money).

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The Greek economy only accounts for around 2% of the Euro’s (NYSEARCA:FXE) total economy.  Thus, a Greek exit, although perhaps an expensive endeavor to exchange all the currency and re-print their own money, will likely not have a disastrous impact on the global economy (2).  Additionally, a Greek exit might alleviate some of the issues in the Eurozone caused by its massive debt.  The Euro absorbs new small nations almost regularly these days and does not hesitate to put forward large amounts of capital to convert those economies.  Why, then, have all the pundits decided that this same process in reverse would destroy the world’s recovery from the crash of ’07?  In the simplest of terms, it will not be the doom of us all.  A quiet Greek exit will only help both Greece and the Euro: Greece will quietly inflate its way out of debt, and the Euro will have one less thorn to worry about in its back.

Despite the litany of chatter surrounding a Greek exit of the Euro, world leaders have already taken ample measures to keep Greece afloat.  The recent G8 Summit has proven that European leaders can agree on one thing: Greece should stay in the Euro.  Hollande of France (NYSEARCA:EWQ) and Merkel of Germany (NYSEARCA:EWG) have resolved not to let the Greek government exit the Eurozone (3).  Their reasons for keeping Greece, however, are not out of fear of what a Greek exit would do to the Euro (NYSEARCA:FXE) fiscally.  A Greek departure might even have a positive effect on the Euro, if not for the symbolic nature of such an event.  The strength of the Euro comes from solidarity among nations.  If Greece were to simply leave, that solidarity would be put into question.

The real danger in Greece is the idea that a European nation can leave the Eurozone at the first sign of danger.  If Greece leaves, what then would prevent other big debtor nations from leaving the Eurozone?  Granted, Greece’s small stake of 2% is marginal to the overall Euro economy, but if Greece leaves, Spain (NYSEARCA:EWP), Portugal, Ireland, and perhaps even Italy (NYSEARCA:EWI) might consider leaving as well.  The consequences of such a chain reaction would cripple the Euro indefinitely.  At the end of the day, the pundits are right: a Greek exit from the Eurozone would be the end of us all.  But their reasons for saying so are misguided.  The real danger is for Greece to set a precedent for other nations, leading to a union-wide dissemination, and thus bringing the global economy to its knees.

Bottom Line:  A Greek exit from the Eurozone will have little immediate effects on the European economy.  In fact, such an exit may boost the Euro for a short time.  But a Greek exit will set a precedent for other large debtor nations, and may cause a series of exits by other Eurozone states, leading to a Euro-meltdown.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

Written by Christophe Adrien