Tuesday, July 24, 2012

Euro exit talk risks self-fulfilling prophecy

by Paul Taylor


July 23, 2012

To understand the impact of a potential Greek exit from the euro zone, imagine an operating theater inside a betting shop.

As surgeons prepare to amputate a gangrened foot to prevent infection spreading to healthier parts of the body, gamblers on the sidelines lay bets on which limb will be next for the chop.

Talk of a possible Greek exit has already sapped investors' confidence in the 17-nation single currency area and contributed to higher borrowing costs for Spain and Italy. It is making a planned return to market funding next year harder for Ireland and Portugal, which are implementing tough bailout programs.

Some European politicians and central bankers clearly see jettisoning a delinquent member as a salutory lesson to others not to abuse club privileges. Like the English in Voltaire's philosophical novel Candide, they believe "it's a good thing to execute an admiral from time to time, to encourage the others".

Other policymakers and market participants fear that pushing Greece towards the exit would start a chain reaction, materializing huge costs for investors and taxpayers and perhaps triggering a break-up of the euro.


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