Felix Salmon, a self-described sovereign debt geek (better than being a sovereign debt Greek at the moment), has a hard time explaining why Americans should care about potential Greek default. The answers in his comment are largely unconvincing, since they rely on people being persuaded by analogy: it’s just like our problems with municipal debt, or it shows what happens if you let the debt/GDP ratio get out of control. I have a more prosaic suggestions. A Greek default would cause a further drop in the Euro and a rise in the US dollar. US exports, which need all the help they can get, would be harmed. That’s not good for a still-sputtering economic recovery in the US, and it’s even worse for job recovery in the US.
We may not have a Greek default, of course. Paul Krugman reckons the weekend rescue package “does rise to the scale of the problem, and it might work”. I generally adhere to Brad DeLong‘s Krugman rule: 1. Krugman is always right; 2. if you ever have cause to doubt Krugman, see #1.
But what ifs are both enjoyable and valuable. I had a good discussion with some colleagues the other day about the widening ripples from Greece. Contagion spreading to Portugal, Ireland, Spain and Hungary. Sure. The UK getting caught in the web, perhaps, but the flexibility to let sterling slide helps a lot.
I find myself speculating about what happens to Germany. It’s still one of the world’s great exporting nations. It just lost the crown to China, but 803 billion Euros of exports in a recession year isn’t too shabby. I’ve always understood that one of the keys to the global success of Germany’s manufacturers was the discipline of the strong Deutschemark, and more recently a strong Euro. So what happens when the Euro becomes a soft currency? Will German manufacturers suffer the British disease? Cultural changes like that don’t happen quickly, but an extended period of working with a weak currency could bring changes we don’t yet expect.
Update Uh oh. A problem with the Krugman rule. Felix Salmon points out that there’s a Sunday Krugman view and a Monday Krugman view. He’s not so happy today.