Germany Is Likely Concerned that a Greek Euro Exit Could Set an Example

October 18, 2012

A NYT piece that discussed negotiations between Greece and the “troika” over its budget deficit should have pointed out the risk to Germany and the other core euro zone from a Greek exit from the euro zone. The austerity policies demanded by the troika have led to 25 percent unemployment in Greece. With the economy projected to continue to contract for at least another year, the unemployment rate is almost certain to go higher.

By contrast, if Greece were to leave the euro and re-establish its own currency, it would experience a full-fledged financial crisis and a period of extreme disruption, but its economy would likely then bounce back quickly, as was the case with Argentina in 2002. The troika is undoubtedly concerned that if Greece were to follow this path it would set an example for Spain, which also has 25 percent unemployment, and possibly other crisis countries in the euro zone.

For this reason, the troika will almost certainly back away from demands if the Greek government proves unable to meet them. It does not want to risk a departure from the euro of one of the larger countries.   


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