(By Mani) Yesterday, we wrote an article titled Will Greece Exit Euro? Today we will see if it matters is Greece leaves the EU.
A Greek abandonment of the euro would have severe implications, at least in the short term, for most Greek residents and businesses. Abandonment of the euro would go hand-in-hand with a default by the Greek government. The drachma would depreciate sharply, and the Greek banking system would collapse.
"Although the Greek economy would ultimately rebound as Greek exporters realized a significant improvement in price competitiveness, economic output in the Hellenic Republic would nosedive even further in the near term," Wells Fargo economist Jay Bryson wrote in a note to clients.
In the grand scheme of things, however, does a Greek exit from the Eurozone really matter to companies and individuals that are not domiciled in Greece?
Some a brief stats about Greece according to the IMF. Greece was the 35th largest country in the world on a nominal GDP basis in 2010. It is one-tenth the size of the German economy. If it were ranked among U.S. states, the Greek economy would take be number 15, coming in about $50 billion smaller than the state of Washington. According to the IMF, U.S. exports to Greece account for less than 1 percent of U.S. exports.
Against this backdrop, why are financial markets swooning over whether this small country abandons the euro? The answer has to do with the contagion effect and the impact for larger economies struggling with sovereign debt issues of their own.
Although the amount of Greek government debt may be a manageable problem, the amount of Spanish and Italian government debt outstanding is significantly larger, and the recent back-up in yields on Spanish and Italian government debt is making it more difficult for these large economies to stabilize their government debt-to-GDP ratios.
"If Greece were to abandon the euro, a roadmap would then exist for an event that once was considered inconceivable: a country's exit from the Eurozone," Bryson noted.
If Greece can leave, what is to prevent Portugal, Ireland, Spain and Italy from pursuing the same path? Economic collapse and exit from the Eurozone, if confined solely to Greece, would not really matter for the global economy.
However, measured in dollar terms Italy and Spain are respectively the eighth- and 12th-largest economies in the world that collectively account for 5 percent of global GDP. The potential financial and economic fallout of an Eurozone exit by these large economies are significantly more important for the global economy than a Greek exodus.
Exit from the Eurozone likely would have adverse effects on most sectors of the Greek economy, although the groundwork could be laid for return to prosperity in the long run. Given the relatively small size of the Greek economy and financial system, Greek default and abandonment of the euro should not have a marked effect on the global economy as long as its fallout can be confined to the Hellenic Republic.