Imagine being told that you will likely suffer a heart attack, yet not how big it will be or how serious. If you could get your arms around the enormity of the news, you'd want to know whether your body could stand the shock and what the aftermath of the attack would look like.
This is exactly what is going on today in policy circles -- and beyond -- as the world monitors the developments in Greece with a growing feeling of helplessness and concern. Recognition is spreading that Greece faces the rapidly rising probability of another default and, critically this time around, a potential exit from the eurozone. And governments in Europe, and increasingly elsewhere, are wondering what this means for them.
Turmoil in Greece is, of course, nothing new. For more than two years, this once-proud member of the eurozone has stumbled from crisis to crisis, with mounting social costs and deepening economic and political dysfunction. That said, the situation did take a nasty turn for the worse last week as reports surfaced of ordinary citizens rushing to pull their money out of domestic banks, fearing for the safety of what remains of their savings.
The question now is whether the policy response is able to step up to this further twist in the protracted Greek tragedy, especially as bank runs can easily get out of control. If policies lag again, this will increase the probability that Greece would be forced not just to default again but also to exit the eurozone -- what is now called a "Grexit." If that scenario unfolds, Greece will face the prospect of an even deeper and longer economic, financial, political, and social implosion -- and the world would face significant risk of collateral damage.
In public at least, European governments are standing firm about their desire to avoid a Grexit. This sentiment was stated again during last weekend's G-8 summit. But words are not enough. The governments of Europe must urgently find a way to reassure Greek depositors that their country's continued membership in the eurozone is not just desirable but also, and critically, feasible. After all, it is hard for these depositors to believe even the most reassuring words at this point -- when national politics is so messy, jobs are rapidly disappearing, and European partners are visibly and repeatedly hesitant about sending the country checks.
And the dangers are real. Should Greece be forced to exit the eurozone, it would do so without a mechanism or a precedent. Indeed, with its probability continuing to increase, a Grexit would likely prove expensive and disruptive -- and not just for Greece. Virtually every other country in the world would feel an impact -- economic, financial, or both.
A Grexit would be sure to contract further European demand, increase risk-aversion, and raise serious questions about the health of some banks and their customers. It would be a shock that would certainly dampen global growth -- but right now, it's still hard to make accurate predictions about what its magnitude and duration would be. Thus, given the degree of uncertainty, it's critical that governments -- and not just those in Europe -- make arrangements to minimize and absorb the external disruptions that could stem from a disorderly Greek exit.