Investors are excused if they’re experiencing a strange case of déjà vu. Here we are again, staring down scary European headlines, a sagging equities market and wilting investor confidence. These days, it seems like this happens every few months or so.
It is quite hard to look away. Greece seems poised to leave the eurozone after elections next month, exposing the rest of Europe to a number of evils—contagion, recession and fear. Think of Greece as Europe’s Pandora. And to be sure, American preoccupation with Europe is less schadenfreude than prudence. Anything affecting Europe is also likely to mean difficulties Stateside. From luxury retailers like Ralph Lauren to technology companies like NetApp, it’s bound to become a bumpy ride across industries.
So, here are what some top economists are talking about, when it comes to Europe:
1. Goldman Sachs, Huw Pill
European bank lending already tightened after the financial collapse 2008, bringing strict lending conditions and credit rationing. If nothing goes wrong in Europe now, credit supply will stay tight; the eurozone’s GDP is already on pace to decline 0.5% in 2012 and 2013. That’s assuming, though, Europe avoids a Greek exit. Should that happen, lending would decline at a rate similar to the collapse of Lehman Brothers, and the GDP decline would expand to 1% in 2012 and 1.5% in 2013.
2. BlackRock, Nigel Bolton
It’s going to get worse until the Greek elections on June 17. An anti-austerity government would not necessarily mean a Greek departure. It could possibly mean bank runs throughout the eurozone. If Greece goes, Europe’s defenses are too weak to sustain the contagion. Rescue funds are still being built, and its central decision making is weak. “The European Central Bank has enough firepower to end any crisis immediately—but is loath to do so for fear of going beyond its inflation-fighting brief and giving a free ride to countries that do not even attempt to balance their books.” European policymakers act only when confronted with a crisis. To Americans, they seem slow moving, likely because their “pain threshold” is higher.
3. IHS Economics, Nariman Behravesh and Sara Johnson
A contraction is coming in the second quarter and for all of 2012. The chances of Greece leaving? Very high. This may not be as large a disaster as some economists suggest. Yet, the expected financial turmoil will impact weak economies like Italy and Spain, places with rising long-term interest rates and contracting economies. Political backlash against austerity could mean less help than you’d think, leading to divided governments and a lack of consensus.
4. Citi, Willem Buiter
Greece’s exit would act as a catalyst. “Grexit will not end the crisis.” Should Greece leave the eurozone, the remaining countries are bound to be affected too. [Citi estimates there’s a 50% to 70% chance Greece leaves.] None should need to follow Greece’s path. The ECB would need to cut rates by 0.5%; resume monetary easing and prepare financial packages for Spain, Italy, Portugal and Ireland. Eurobonds seem unlikely, but if capital flight ensues, the eurozone may need to adopt deposit guarantees.