Barclays’s Julian Callow on Europe

Barclays’s head of international economics explains how dangerous a Greek default would be and why Germany can’t bail out Europe

Why should Americans care about the resolution of the euro crisis?
If you go to your average person, say on Main Street U.S.A., before the crisis, they might not have heard of Bear Stearns. But you can be sure they would have heard of Greece. If Greece is having a substantial default on its debt, that is very big news. And we cannot really predict exactly what the consequences of that will be in terms of confidence through the global financial system. We have had defaults historically from Argentina, from Russia, but this is a much more significant event.
And if the IMF has to put up some money, that is one thing Americans should care about, because we are going to have to contribute.
Clearly, there is a reluctance on the part of the U.S. to commit a whole lot more IMF funds to Europe. And the problem is that if Italy is in difficulty and needs financing from the rest of the euro area, the rest of the euro area cannot really stump up enough capital to support that. Germany is only 27 percent of euro zone GDP. Italy is 17 percent of euro zone GDP. So Germany isn’t big enough in my view to be able to provide overwhelming support.
That’s the statistic of the week! I would have said 40 percent for Germany.
We all depend on Germany in Europe to write the checks. Germany has a very successful economy. But ultimately it is not so large that it can just underwrite everything here.
What actually does Barclays feel Europe will do in 2012?
I think at best we can just hope for GDP to be roughly flat. The danger is that we are, in fact, going to see some weakness emerge and that the economy, therefore, is going to move into recession. We are actually quite cautious about the euro zone right now because there are profound uncertainties regarding Greece.

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