With all of the speculation surrounding Greece’s possible exit from the EU and the euro as a currency, it is a good idea to understand the significance on Greece as a member of the EU. First, Greece only represents 2% of the total EU GDP. To look at it another way, only about 2 cents of every dollar of EU GDP comes from Greece. The EU represents about 14% of total U.S. GDP, or about 14 cents of every dollar of U.S. GDP generated each year comes from the EU countries. This is a meaningful amount, so it stands to reason that U.S. investors and consumers should be concerned about the economic welfare of the EU member countries. If we assume the EU country spending on U.S. goods is evenly distributed among the EU countries according to their individual GDP (an assumption that likely overstates Greece’s contribution to that 14% of U.S. GDP statistic), then Greece represents 2% of that 14%, or about 0.28% of U.S. GDP. To put this in perspective, Greece spends about one-quarter of one cent of every dollar spend on U.S. goods and services each year. In other words, Greece is meaningless in terms of both EU and U.S. GDP.
Given these facts, why are the EU countries fighting so hard to keep Greece in the EU? Great question! My belief is that they should not wait for Greece to default on their sovereign debt (they already have in essence with the structural default that occurred a few months back anyway). The EU should kick Greece out of the EU now, before Greece has a chance to exit on their own. This would show that the EU was being proactive, decisive, and most importantly would free-up money that they will be forced to give (yes give because Greece is never going to repay any of the bailout funds it has received or will receive) that can be used to help Spain, Italy, Portugal, Ireland and any other EU countries that need help right now. Greece will default sooner or later, unless the EU is basically willing to continually give them money with no hope of repayment, so that the Greeks can continue to spend more than they earn, in perpetuity.
A Greek default down the road might be more acceptable, since the economies of the other EU countries could be stronger at that point, and therefore more able to absorb the pain. But, it is a very high price to pay having to continue to fund Greece’s deficits and overspending. More importantly, the money wasted on Greece is needed for Spain and Italy right now and there are limited funds available to support these two countries, both of which have much larger GDPs and would be therefore much more destructive to the EU should they default and exit the EU and the euro. I believe that the EU must act and act now to dump Greece. As previously stated, Greece will default and exit the EU and the euro, it is just a question of when and how costly it will be to delay this inevitable outcome.