Larry Summers: Greek Crisis 'Could Have Significant Adverse Consequences for US'

The conflict between Greece and its European creditors over restructuring its debt continues, with talks between the two sides breaking down Monday without agreement.

Former Treasury Secretary Larry Summers says there's a danger of Europe's woes spreading over to the United States.

"The larger question is, is Europe in danger of becoming the new Japan, with a combination of weakness, sclerotic decision making, deflationary pressure, unaddressed debt burdens, leading to dismal economic performance with adverse consequences for itself and for the global economy," he told USA Today.

"My best guess continues to be that a way through will be found, because it is in the mutual interest of Greece and Europe to find a way through." But that's no guarantee, Summers notes.
Greece's current bailout program expires Feb. 28.

He explains three ways in which this could hurt the U.S. economy.

"First, a weaker European economy slows the global economy and demand for our exports," he explained. "Second, a weakened European economy and more problems in European markets could increase risk aversion and drive liquidations with adverse consequences for U.S. markets. And third, trouble in Europe portends a stronger dollar, which reduces the competitiveness of U.S. exports more globally, reducing aggregate demand."

"The risks from what happens in Europe are significant for the global economy. The fact that there have been developments in Europe associated with so much dollar strengthening and with a large decline in U.S. long-term rates suggests that European developments may be adverse for the U.S. economy for quite some time to come."

Concern is growing that Greece will have to exit the euro and the 19-nation alliance that goes with it.

An exit is now the most likely outcome, Robin Marshall, director of fixed income at Smith & Williamson Investment Management, told Bloomberg. And Commerzbank economists Joerg Kraemer and Christoph Weil say the odds are 50-50, compared with 25 percent a week ago, according to the news service.

"It is a completely new situation, but the general opinion on Greece leaving the eurozone is more or less relaxed," Michael Schroeder, an economist at the ZEW institute in Germany, said at a press conference, Bloomberg reports.

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