Thursday, May 31, 2012

Will This Greek Tragedy Climax in the Death of the Euro?

by Douglas J. Elliott

Brookings Institution

May 31, 2012

Greece could well be out of the euro soon, depending on the results of the election scheduled there for June 17. Such an exit could conceivably occur even before the election if enough people take actions to anticipate a euro exit, unintentionally precipitating the event. An exit would inevitably be messy and has the potential to push Europe into a severe recession, the U.S. into at least a modest recession, and to substantially slow the growth of China. The Institute of International Finance has estimated an exit could cost the world economy over $1 trillion and official bodies such as the International Monetary Fund (IMF) have similarly warned of disastrous results.

This paper answers the following questions about a potential euro exit:
  • What is the probability of an exit from the euro?
  • Why might Greece exit?
  • What is the argument about austerity and growth?
  • What is likely to happen in the Greek elections?
  • What will happen after those elections?
  • How might a Greek exit develop?
  • What would the damage be of a Greek exit?
  • Why might other countries exit?
  • What can the euro area do to stop further exits?
Read the Paper

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