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Commentary: Prevent Greek turmoil from bringing down global economy


Greece, although accounting for only 2.3 percent of the euro-zone output and 0.4 percent of the global total, is now poised to trigger a tsunami large enough to engulf the whole world economy.

The upcoming parliamentary election on Sunday is expected to decide Greece's future in the euro zone. Citing pre-election polls, Credit Suisse predicts a 40-percent chance each for the pro-euro and anti-bailout coalitions to win, with a 20-percent probability for a stalemate.

A victory by the anti-bailout alliance would very likely lead to Greece's exit from the single currency bloc in the short term. A win by euro supporters would preclude the so-called Greexit for the moment, but, given the country's worsening debt and economic problems, the medium- and long-term prospects remain worrisomely unclear.

In the case of a political impasse, just like the one that followed the previous vote in May and prompted this re-election, Greece's fate with the euro would hang in the balance.

Now talking about Greexit is no longer a taboo. In fact, the probability of the scenario is rising. Although it is too early to tell whether Greece would leave and when, policy-makers around the world cannot count on luck.

It is time for the international community to act in advance and prevent the Greek turmoil from dragging down the world economy. And it is time that the EU gave up its ostrich mentality and faced up to the risks of a Greek departure.

Fortunately, EU finance officials have reportedly started making contingency plans, including introducing eurozone capital controls, imposing border checks, suspending the Schengen agreement and even limiting ATM withdrawals.

But such a stopgap package is far from enough. The euro zone must keep the cabins of Spain, Portugal and Italy watertight in order for its economic ark to survive a crack in the Greek compartment.

That said, the recent rescue lending for Spanish banks was a step in the right direction, but the EU should devise stronger preventive measures. Meanwhile, it should upgrade its band-aid approach as soon as possible to comprehensive arrangements like aligning national fiscal policies and establishing a bank rescue mechanism.

The Greek crisis is not only a problem for the Greeks and the euro zone, but a common threat to the whole world, because a Greek exit, if not handled properly, would impact the global economy from the fronts of confidence, finance and trade. A probable result would be a worldwide financial and economic tsunami like the one triggered by the collapse of Lehman Brothers in 2008.

Thus the international community should do two things at the Group of 20 summit scheduled for June 18-19 in Mexico. First, it should exert more pressure on the euro zone and demand the bloc to improve short-term contingency plans and speed up reforms.

Second, the major world economies should establish a global macroeconomic policy coordination network, as they did during the subprime mortgage crisis, and set up contingency plans based on the worst-case scenario of a Greek exit.

Developing economies vulnerable to external influence should be especially cautious. As the World Bank warned Tuesday, they need to brace themselves for a possible global economic slump by creating more room for maneuver.


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