As Goes Greece, So Goes the Euro

If Europe lets Greece go, these could become collectors' items.

Photographer: Petras Malukas/AFP/Getty Images

German Chancellor Angela Merkel is said to view Greece's exiting the euro as a manageable risk that would pose no existential crisis for the common currency. That opinion, if she indeed holds it, is misguided at best and dangerous at worst.

It's true that Greece poses a less naked financial risk to the rest of the euro region than it did in 2009, when revelations about the true size of its deficit triggered the ongoing crisis. Today, only about a fifth of Greek government debts are owed to the private sector, thanks to the country's bailout by the European Union, the European Central Bank and the International Monetary Fund. And borrowing by Greek private companies accounts for less than 1 percent of loans made by Europe's biggest banks, according to JPMorgan.

Greece's Fiscal Odyssey

So it's true that, if Greek elections later this month produce a new government prepared to default on its debts rather than continue with austerity, the financial repercussions will be limited. That says little, however, about the chaos that could accompany the country's departure from the euro. Contagion is never predictable.

Once inclusion in the euro is shown to be ephemeral -- despite the EU treaty's insistence that membership is "irrevocable" -- then other of the currency's weaker members will be vulnerable to speculation about their staying power. Investors may be driven to short the bonds of Italy, Portugal or Spain -- no matter how strong the economic or political arguments against their leaving the currency union -- driving their borrowing costs to levels they can't afford.

To be sure, Der Spiegel's report about Merkel's intentions might not accurately reflect Germany's attitude to a Greek exit. Joachim Poss, a German coalition lawmaker, said today that the consequences would be "incalculable." And German government spokesman Steffen Seibert noted the region's policy is "to stabilize and strengthen the euro area, the euro area with all of its members, including Greece."

Nevertheless, the mere discussion of a potential fracture in the euro zone should be a warning to European leaders that their path to ever-closer union is anything but assured. The euro has slumped to its weakest value against the dollar since 2006. Although there are other factors involved, it is a reminder that investors aren't keen on putting their money into a currency with an uncertain future.

Make no mistake: No matter how much some politicians might claim that they've contained a potential Greek crisis, they have not. Any country exiting the euro would throw the common currency's continued existence into doubt. 

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.