The global economy is responding to the Greek crisis like a chicken with its head cut off. Take a deep breath, says First Trust, a Greek default wouldn’t be that bad.
Sure, Greece defaulting is not an ideal situation by any means, but comparing it to the Lehman Brothers default in 2008 is a step too far, First Trust writes in a recent economic report. A default won’t destroy the world markets. Instead, consider Greece a Detroit.
“We believe that a Greek default will look and feel more like the Detroit default. In other words, it may make a great deal of noise, but the European economy will not collapse. In fact, we believe any sell-off in the equity markets is a buying opportunity,” First Trust writes.
For starters, this isn’t Greece’s first financial disaster rodeo. Since becoming an independent country in 1892 until 2006, Greece was in default or rescheduling its debt 51% of the time. While the Lehman collapse shocked the world, Greece has been a slow and visible crumble.
Literally, the Greek economy is comparable to Detroit. The Greek GDP was about $240 billion in 2013. Detroit’s was $224 billion the same year. Similarly, the GDP of the E.U. is about equal to that of the U.S. The E.U. should be able to handle the Greek market much as the U.S. did for Detroit.
The money sunk in Greece has already been totally sunk. Growth has been negligible, and the money has been gone for a while. Additional money won’t disappear; it’s already been spent.
The Greek crisis could force more fiscal discipline in individual countries, much as the Euro’s creator Robert Mundell hoped, writes First Trust.
“While the Euro didn’t stop Greece from borrowing its way into bankruptcy; it is finally imposing Mundell’s discipline. If the EU does the right thing, and forces true austerity or allows a default, then the Mundell hypothesis about a single currency will be proven correct. This could be the best thing that ever happened to Europe.”
Photo: Dennis Jarvis via Flickr.