May 25, 2012What would a Greek exit mean for US economy?
Uncertainty over the fate of the euro currency is already dampening US economic growth and any significant worsening of the crisis would deal a blow to a recovery that is gradually gathering steam.
Economists estimate that volatile markets and business uncertainty over the fate of Greece and the policy course in Europe is already shaving anywhere from one tenth to one half a percentage point from US 2012 gross domestic product growth.
In a Reuters poll last week, US GDP was forecast on average at 2.3 percent for 2012 and 2.4 percent for 2013.
The direct hit to growth comes through trade. US exports to the European Union account for 19 percent of total exports, and those to the euro zone represent 13 percent of the total. But when calculated in terms of GDP, the share is tiny - only 1.3 percent of total output.
The indirect effects are another matter. Europe in 2010 accounted for 25 percent of world trade, according to Deutsche Bank. Europe also is the biggest trading partner for China and the United States. Loss of this market would ripple worldwide and slow global growth.
The other indirect impact is through the financial sector.
If Greece were to leave the euro zone, it would raise questions about the survival of monetary union and trigger turmoil in markets. Business investment would stall, banks would pull back on credit, and lost wealth as equity prices fall would cause consumers to slow their spending. Commodity prices would plunge, helping importers but hurting growth in export economies.
The extent of the damage would depend upon how quickly global policymakers could stop the rout and stabilize markets.
Following is a look at three scenarios for the euro zone and the likely impact on the US economy.
Scenario - Greece elects a government on June 17 that continues implementing the EU/IMF bailout program, possibly with some softened conditions. Greece stays in the monetary union for now. Spain recapitalizes its banks, possibly with some EU help. ECB liquidity injections and EU-wide guarantees help stabilize the big French and German banks to insulate them and the broader financial markets from further damage. Bouts of market uncertainty continue in the months and years ahead, but gradually EU integration advances.
Impact: Ongoing volatility in financial markets and slow-to-mildly negative euro zone growth would continue acting like a low-grade fever weakening US growth. This already is the baseline scenario for most analysts' forecasts. TD Economics said it has marked down its 2012 outlook for 2.0 percent growth by about a quarter to half a percentage point because of Europe. IHS Global Insight has trimmed about one tenth of a point from its 2.2 percent forecast for this year.
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