This is certainly within the realm of a “testable hypothesis”. Talking heads in Europe say it is inevitable that Greece will leave (or be forced out of) the Eurozone if the left wins the Greek parliamentary elections coming up (again) next week. But if this one talking head interviewed by The Guardian, Robert Choate of the Office of Budgetary Responsibility in the UK, is correct, that would bring recession, even to a country like the UK which is outside the Eurozone.
As I have indicated here before, I think that expelling Greece from the Eurozone is pretty clearly not only bad news for Greece, but for the whole of the EU, and for countries and trading blocs doing business with the EU. (By the way, that last group includes us over here in North America.)
The real contagion comes not from Greek sovereign debts, but from an eviscerated Greek economy…and by that, I mean, 1/27th of the European economy.
There are things that offset Choate’s conclusions, it should be noted. I recently got into a tweet battle with one of our local columnists, Dan Gardner of the Ottawa Citizen, about whether people would buy more bonds in the US if it were regarded as a “safe haven” to store money given the alternatives (e.g., Europe). Interestingly, Robert Choate floats that same possibility in Britain’s case here in this article…perhaps UK bonds would be purchased because it’s not part of the Eurozone and hence “safer”. Of course, the problem with that kind of thinking is that it’s relativistic. If there’s someplace seen as a “safer haven” with reasonably low bond prices (offering reasonably high yields), people will buy there. It’s a lot to stake one’s hopes for the future on a country being the least unsafe of a set of unsafe places to store your money. I told that to Gardner and I’d just as soon suggest that here.
But the basic point remains – kicking Greece out of the euro and expecting the EU countries not to plow straight down into a massive recession…well, that’s an expectation we can test as a hypothesis. I suspect it’s an expectation that would almost immediately be repudiated by economic events. But if Europe wants to give it a go, it will do so. And then we’ll see.
Do ya feel lucky, punks? Do ya?