Putting Greece in its Place

July 17, 2015

There has been much talk about a potential “Grexit,” as some believe it is inevitable and may be the best solution in the long run. Nonetheless, Greece is receiving its third bailout in five years to prevent such a thing. The new bailout plan comes with some tough austerity measures in which Greece will have to make cuts to pensions and increase taxes in order to receive €86B ($96B) in new loans.

The fear of contagion has been cited as a reason for yet another Greek bailout. If Greece were to leave the Eurozone, a dangerous precedent may be set and other countries with high debt levels (such as Spain, Italy, and Portugal) may decide to follow. Even if these countries do stay, they may have difficulty finding investors to purchase their bonds. On the other hand, by continuing to bail out Greece, these countries may be less willing to make reforms and come to expect their own bailouts if their debt gets out of hand.

However, this week’s chart puts the Greece situation into perspective, particularly for U.S. investors. For all the attention Greece receives, it has a smaller economy than the state of Wisconsin and is less than half the size of Illinois. Even among the Eurozone, Greece contributes a mere 1.9% to the area’s GDP. Though there is the possibility of a domino effect, it seems unlikely that the events in Greece will have a large effect on the global economy.