Bailouts are a pressing problem for the entire financial world today, and will continue to affect financial sectors adversely. However, it is crucial to analyze what would happen if current European bailouts were completely removed from the equation. Many Euro zone leaders have asserted that in order to give Greece a second bailout, the country needs to demonstrate that it will reform its economy.
The rest of the Euro zone seems to be unprepared for a Greek default as a number of banks have bonds and other financial instruments that are tied to Greece (Morris, 2011). Nonetheless, the odds are very much against this country because it has already been shown that very little else can be done in order to restructure its economy.
Providing it with more funds to service other debts can be likened to a person who is stuck in a gigantic bucket and is trying to get out by reaching for the handle. Some experts claim that defaulting is inevitable for Greece (Isidore, 2011).
If this is to occur, the Euro zone and the rest of the world would have to pay dearly for this. It would threaten the strength of the Euro and more member countries will consider dismissal of Greek from the EU as a plausible option (Dobby, 2011). The only problem with this option is that currently, there are no mechanisms in place to deal with the exit of a member state.
Furthermore, this would create a ripple effect in which the Union would consider ousting weak members (Lilico, 2011). Greece is not the only country that is at risk of defaulting- Ireland, Italy and Spain are still on the list of weak economies in the EU. If more countries are expelled, the very existence of the Union will be threatened, yet this is a concept that member countries have been working on for decades.
A Greek default would mean huge losses for a number of financial stakeholders. Some investors who hold Greek bonds would not recover their investments. This would cause other investors in Spain, Portugal, Italy, Ireland, and Spain to flee from those debts as well. Banks in the rest of the Euro zone would be adversely affected. This would spread out to other countries of the world that partner with the EU (Isidore, 2011).
The default could trigger a series of other defaults throughout the rest of the European Union. This would be prompted by the lack of leadership from countries such as Germany, which have already washed their hands off the debt crisis issue (Sanati, 2011).
If this were to occur, the European Union would plunge into another recession because the common currency would be devalued. Of course, this would affect the US economy, which would probably fall into a double dip recession (Isidore, 2011).
It is clear that stresses of the EU’s financial system will create a ripple effect in the rest of the economic market. The United States would be particularly affected because its exports would be weaker, there would be substantially lower credit and the financial conditions in the country would become even tighter (Gouliamaki, 2011).
The current economic problems of the EU call for a change in the Union’s economic policy approach. If the Union hopes to survive through the economic crises of its weaker partners, then it needs to have a strong leader such as Germany. The country would offer a unified voice and would strike a balance between the economy and politics.
If no strong leader emerges, the EU might loose Greece alongside Spain, Ireland, Portugal and Italy as member countries. Political elites in the EU are unlikely to sit by and watch this happen (Sanati, 2011). They have a lot to loose if the Union starts to disintegrate. The defaulting crisis is a quagmire that is yet to be fixed. Its repercussions have an adverse effect in the EU and will definitely affect the rest of the world.
References
Dobby, C. (2011). What happens if Greece defaults? Financial Post. Web.
Gouliamaki, L. (2011). Greek default, new crisis essential for Europe’s economic recovery. RIA Novosti. Web.
Isidore, C. (2011). Greek default: What it would mean. Web.
Lilico, A. (2011). What happens when Greece defaults? The Telegraph. Web.
Morris, C. (2011). Geithner warns EU against infighting over Greece. Web.
Sanati, C. (2011). What happens after a Greek default. Fortune. Web.