A decision by Greece to leave Europe's common currency zone would raise big questions about the impact on Spain, Italy and other eurozone countries with big debt loads that are undergoing structural reforms, the head of the World Bank said on Wednesday.
The eurozone crisis poses the biggest threat to the global economy, World Bank President Robert Zoellick said in a question-and-answer session at the Washington Economic Club.
"The core question will be not Greece, but Spain and Italy," he said. If Greece decided to leave the euro zone, the ripple effects could be very damaging, reminiscent of the Lehman Brothers collapse in 2008.
"Where the danger comes in is when events come and they start to affect confidence and you get illiquidity moments, and illiquidity moments start to mean something begins to tumble, whether it's companies or banks," he said.
European leaders need to find ways to get ahead of the problem and provide support to Spain and Italy, which are undertaking very difficult reforms, he said.
"The key issue you have got to come to terms with is if you are to have medium-term reforms, you are going to need some medium-term assurance for investment," he said.
This could be provided through eurobonds issued through the European Stability Mechanism, utilizing the resources of the European Investment Bank or some other mechanism. "Those are for the Europeans to decide. But I think they are going to need a funding match with the reform match."
European Union leaders this month are due to discuss a Growth Pact which is expected to include infrastructure investment funds and some flexibility on meeting deficit targets for countries in recession.
But Greece is in turmoil and headed for fresh elections on June 17 after political parties failed to form a new government. Voters on May 6 resoundingly rejected the austerity measures required under an EU/International Monetary Fund bailout program, leading to increasing discussion that Greece will be forced to leave the monetary union.
U.S. DEBT PROBLEMS
As for the political stalemate in the United States over reducing its budget deficit, Zoellick said it is a vital issue that threatens the United States' preeminence in the world and is leading Asia-Pacific countries to question its ability to handle the issue.
If asked for financial advice by presumed Republican presidential candidate Mitt Romney, Zoellick said his reply would be: "Get a budget deal."
"The key for the next president, whomever it is, will be to face up to this issue, because this - I can say as an American in an international organization that has spent a lot of time around the world - this is the number one indicator of whether the United States will be a strong, innovative, productive country."
Zoellick, a Republican, is stepping down from the World Bank when his term expires in June. His name has been mentioned as a possible candidate for Secretary of State or Treasury Secretary in a Romney administration.
He praised the work done by the Simpson-Bowles budget commission but said a sustainable path for Medicare would need to be addressed and that there is broad-based interest in tax reform.
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