The United States Isn’t Immune to Grexit Fallout
Greece's exit from the eurozone would have dire consequences for Europe. But it would also impact the United States.
Greece’s anti-austerity Syriza party and European leaders are scrambling to find a deal that would allow Athens to pays its bills; if they don’t, Greece could run out of money in the coming months and get kicked out of the eurozone. And that wouldn’t be good for Europe or the United States.
The United States has very little direct exposure to Greece, meaning the Mediterranean nation’s exit from the European monetary union (or Grexit, to use the awkward nickname for the possibility of Greece leaving) would not directly cause financial disaster in America. But because of the global nature of the economy, the United States is exposed to countries that in turn are directly impacted by what happens in Greece — Germany, most importantly — and a Grexit would add another level of uncertainty to a continent already rocked by the economic fallout from the war in Ukraine.
It would also raise the possibility that a country with a larger economy — Italy, for instance — could be kicked out of the European Union, an event that would have far more reaching implications around the world. Europe is on the verge of setting a dangerous precedent.
The issue between Greece and its European creditors is simple: Athens is about to run out of cash and can’t pay its bills. It wants a new line of credit before its current loan deal expires Feb. 28. But European leaders, particularly German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble, are skeptical that Greece’s new leftist prime minister, Alexis Tsipras, would follow through on promises to cut budgets (Tsipras campaigned against the austerity programs forced on Greece by Europe). It’s a dangerous game of chicken both sides have been playing for years.
Greece submitted a new loan application Thursday. If it is not accepted by the European Union, Greece could go bankrupt in the coming months. European leaders could then decide it’s not worth dragging along Greece’s stagnant economy, as the EU has done for the last five years, and kick it out of the monetary union.
The immediate impact — the euro would tank — would, in the short term, bolster the dollar. But the United States is Europe’s biggest trading partner, and EU nations would then be paying for American products with weak European currency, meaning European consumers could purchase less.
An equity trader in Chicago, who asked not to be named to speak freely on the possible fallout, said a Greek exit would set a dangerous standard in Europe. It would also rile markets both overseas and at home as traders express displeasure over the volatility it would cause.
“The risks are more than just economic at this point. There is concern over any precedent set with regards to other struggling European nations, such as Portugal, Italy, and Greece. Because it’s such a massive economic entity, you’ve got to worry about anything that will push Europe closer to a recession,” the trader told Foreign Policy. “There’s geopolitical concern over Russia and Ukraine, economic activity is already sluggish, and now you’re looking at even more potential destabilization. So yes, there is concern” about spillover to U.S. markets, the trader said.
There worries prompted U.S. Treasury Secretary Jack Lew to call Greek Finance Minister Yanis Varoufakis on Wednesday to warn of “immediate hardship” if a debt deal is not reached.
According to Edward Goldberg, a professor at Baruch College and the New York University Center for Global Affairs, in the long term the Grexit could also force Washington to reevaluate its faith in Germany as the leader of Europe.
“The U.S. needs Germany as a strong partner who has assumed the leadership of Europe,” he said. “Keeping Europe stable is a key interest of the United States…. It could create [an] additional fault line in Europe if Greece leaves the eurozone.”
Photo Credit: Thomas Trutschel