Cross-posted at Immizen.com with images and links to sources.
Just today, I had a conversation with another friend regarding the European situation with Greece. He thought that because I am half German I would probably want Greece to exit the Euro zone and not have to continue to bail them out. I told him I had no informed opinion on the consequences of Greece exiting the European Union, but that I thought it would be worst for Greece than it would be for the rest of Europe.
He disagreed and compared the Greece situation with what happened to Lehman Brothers during the 2008 economic downturn. The Fed decided to let Lehman Brothers go bankrupt. While Lehman Brothers was not the largest player in the financial crisis, allowing it to collapse exacerbated the situation and caused massive panic as it raised the probability that others would follow including some bigger fish. It was the reason why the Fed was forced to bail out the big banks. His point was that if Greece is allowed to exit the Euro zone it would likewise cause massive panic and especially affect the Spanish and Italian economies.
A Wall Street article from May 22nd, 2012 has a list of expert opinions on what would happen if Greece would leave the Euro Zone. The main consensus is that it would lead to a sharp selloff in the Euro and a drop of the Euro to as low as $1.01. The contagion effect that my friend mentioned is also mentioned in that article as a real risk of a Greece exit from the Euro Zone.
In today’s interview with the “Spiegel” news magazine, the German Finance minister Wolfgang Schäuble warns against allowing the Euro currency to collapse. If that happens, much of what has been achieved and is being appreciated today would no longer be reality in Europe, such as an European single market and travel freedoms. Introducing a new German currency, like the Deutsche Bank had suggested, would decrease economical growth by 10% and increase the German unemployment to 5 Million people.
Meanwhile, the Spiegel reports that the Italian Economy continues to shrink. Italians are resisting the austerity plans by Mario Monti, the Prime Minister of Italy, and the unemployment rate among younger workers has risen to unprecedented levels. Spain received a bailout from its Euro partners but has been punished with record borrowing interest rates.
Schäuble’s conclusion is that the benefits of bailing out Greece outweigh the risks.
I guess he is on a mission to convince the German people to support the bailout. The Spiegel reports that 78% of Germans and 65% of French support an exit by Greece from the Euro zone. According to Schäuble and many economists, the consequences are dire and not just for Europe. The USA and the whole world have a vested interest in having Germany save Greece and the entire Eurozone. It seems unfair that it has to be the prudent, resourceful, hardworking Germans who have to come to the rescue of countries who did not exhibit those virtues. But Germans need to learn if they not already know it, that sometimes, helping others ends up helping them more than if they turn their back on them.