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Greek crisis fuels concern over collapse of euro

By Josephine McKenna: 0 Comment(s)Print E-mail Xinhua, May 20, 2012

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Footing the bill [By Jiao Haiyang/China.org.cn]

As the eurozone crisis dominated the Group of Eight talks in the United States on Friday, there was growing speculation that Greece would exit the euro and threaten the collapse of the common currency.

Economists are not only worried about whether the Greeks will abandon the currency but what impact that would have on Italy and other Mediterranean neighbors.

Italian Prime Minister Mario Monti told the G8 on Friday that Italy had "its house in order" but there are more than 2.5 million people unemployed and new figures released on Friday showed one million fewer Italians were employed compared to five years ago.

Meanwhile European stocks fell for the fifth consecutive day on Friday over concern about Greece and Spain as the price of oil fell and investors moved their money into German bonds.

Policymakers and other experts say although up to 75 percent of Greeks back the euro, they seem unwilling to elect the politicians who will adopt the tough measures required to stay there.

Erik Nielsen, global chief economist at Italy's largest bank Unicredit, said the situation in Greece was becoming "increasingly serious" as people were divided over whether to stay in the eurozone.

"Opinion polls in Greece do not suggest a clearer picture for the June election, unfortunately, and there is a significant risk that Greece will slide further towards an economic collapse," Nielsen told Xinhua.

However Nielsen said that Greece accounted for only 2.5 percent of the eurozone's gross domestic product and even less in terms of trade flows. He said although volatility was expected in the markets in coming weeks, he predicted any sell-off would be contained if Greece left the euro.

"Banks and other financial institutions in Europe are now fully prepared for the worst," he said. "However, markets will likely remain very fragile during this period. We have no doubt that the European authorities, governments and the European Central Bank, will be extremely flexible in their response.

"As the eurozone economy - driven by Germany - slowly recovers during the second half, we expect a degree of normality to return."

"We remain confident about Italy and think contagion will be more pronounced in Spain and Portugal."

Greece's caretaker government was sworn in this week after elections failed to produce a viable coalition to lead the country. Leaders across Europe are nervous about the forthcoming election.

"Suddenly the prospect of Greece leaving EMU (European Monetary Union) looks horribly real," said Mark Cliffe, the chief economist at the ING Bank, based in Amsterdam.

"Greek voters continue to signal their continued enthusiasm for staying in. But this is at odds with their rejection of the austerity that is a precondition for the Eurozone's financial support."

Cliffe this week reaffirmed the pessimistic views he made In a report entitled, 'EMU Breakup: Pay Now, Pay Later' released last December and warned that the collapse of the euro would be "traumatic" not only for Europe but the global economy.

"This is a dangerous game and there will be no winners," he said. "True, the private sector has already absorbed losses on their holdings of Greek government debt, but the continued contraction in the Greek economy and growing market fears of contagion in the eurozone's troubled periphery suggest that exit would be no less painful than we previously estimated."

In his report Cliffe said with a complete EMU break-up, the cumulative loss of output in the eurozone in the first two years would be over 12 percent.

"The complexity of financial and trade inter-linkages are such that the short term consequences would be traumatic. In the first year, eurozone GDP might fall by 9 percent. Indeed, these short-term losses would cause lasting damage to growth potential in subsequent years. Even by 2016, output in the eurozone might be some 10 percent below where it would otherwise have been."

Nicola Borri , economics professor at Luiss University in Rome, warned that political momentum may force Greece to exit the euro after the election, but he said the economic impact on Italy would be marginal.

"It is very unclear what is going to happen in the election. If Greece exits the eurozone there would be a run on the banks and the European Central Bank would step in and guarantee liquidity in the market," Borri told Xinhua.

"In Italy the two big banks Unicredit and Intesa San Paolo would weather the storm but the medium-tiered banks like Banca Monte dei Paschi di Siena, one of the oldest, could be hard hit."