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US Economics Professor Warns Greek Exit Could Cause Collapse of EU

© Flickr / Theophilos PapadopoulosDouble trouble
Double trouble - Sputnik International
A top US economist has warned the German media that a 'Grexit' scenario would prompt a devastating run on banks in the Eurozone countries, as well as signal a change in Europe's geostrategic situation.

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Renowned US economist Barry Eichengreen has warned that the consequences of a Greek exit from the Eurozone could be devastating, and that the governments of the monetary union are taking the possible repercussions too lightly.

In an interview with Die Welt am Sonntag, Eichengreen, a Professor of Economics at the University of California, Berkeley, said that the consequences "would spread to other countries. When a Portuguese family or Spanish businessperson sees that euros have been converted into drachmas, they will take their money out of their accounts. That could lead to a run on the banks."

Compounding this scenario, continues Eichengreen, "investors would speculate on the next candidate to leave the Eurozone," thus endangering the entire euro project. Financial markets, according to the economist, are also guilty of miscalculation, with share prices giving an overly positive picture. "My experience as an economic historian has taught me that markets always look relaxed, until suddenly- they aren't."

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"From the banking crisis of 2008 to the emerging markets crises of the 1990s, anybody can take their favorite financial crisis and discover that markets are really not a good crisis indicator. In the run-up to the crash, the players were always too relaxed for too long, and then later fell into a complete panic."

Eichengreen shared his belief with the newspaper that the new Greek government should be given more time: "They should be given some breathing space, which is also in the interests of their creditors. I would be in favor of tying interest payments on the borrowing to economic growth. Only when the Greek economy grows, should the country pay interest, otherwise the payments will simply be deferred."

"The euro is of great symbolic and geostrategic worth for Europe," cautions Eichengreen, adding that such an eventuality on the economic front would also have consequences for the West in terms of the geostrategic situation in Europe. "The West hardly wants Russia to be able to position itself as a savior, and become involved," surmised the professor, adding that this would have "dramatic consequences" for the NATO military alliance.

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