Europe’s Dominos of Doom

BRUSSELS – The fear of contagion has spread over Europe. Many see Greece as the potential first domino to fall in a scenario that runs as follows: the Greek austerity measures do not suffice, the debt crisis deepens, and the risk of a sovereign default spreads to other European economies. As the Greek domino falls, countries like Portugal, Spain, or Italy start tumbling, and a small economy’s crisis turns into a major European calamity.

This view suggests that other countries might be forced to rush and help their European “brothers in arms” – whether or not Berlin or other capitals want to. Eventually, the sovereign debt crisis might hit the real economy, with Europe ending up in a vicious circle of even higher deficits, lower growth rates, exploding unemployment, and decreasing competitiveness.

Obviously, this is the scenario that everyone – with the possible exception of some speculators – wants to avoid. And, after the recent EU summit agreed on an “ultima ratio” rescue plan for eurozone countries facing the danger of default, chances are high that it will not materialize. But the prevailing domino theory is incomplete. The crisis could have social and the political spillover effects that go well beyond the economic realm.

For the sake of illustration, let us stick to the Greek case. The economic situation in Greece is deteriorating quickly. Some analysts have even predicted a “slow death” of the Greek economy. Citizens themselves sense that the situation will most likely get (much) worse before it improves.