1. Felix Salmon » Will Grexit topple Obama? » Print http://blogs.reuters.com/felix-salmon/2012/05/25/will-grexit-...
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Will Grexit topple Obama?
May 25, 2012 @ 11:16 pm
By Felix Salmon
One of the hardest questions to answer, when people ask about the European crisis in general
and the Greek crisis in particular, is “why should we in the US care?” The simple answer is
that well, this is an important part of the world, and it’s big news. But if you only care about
news insofar as it directly effects the US, then the answer is harder.
One possible answer — I’ve heard this given in a number of places — is that another major
crisis in Europe would spill over into the US, cause serious economic damage here, and could
quite possibly make the difference between an Obama and a Romney victory. But just how
likely is that? I’m no expert when it comes to assigning probabilities to events, but we can at
least come up with a general framework which lets us answer the question.
Let’s start with the fiscal pact. Will all of Europe credibly commit to fiscal austerity going
forwards? If so, that increases the chances of crisis and Grexit, since southern European
countries in general, and Greece in particular, simply can’t operate under an austerity regime
in the way that, say, the Baltics have managed, painfully, to do. On the other hand,
everybody seems quite likely to break the fiscal pact in one way or another — which means
that there has to be a good chance the pact will end up being honored mostly in the breach.
Let’s call the probability of a Europe-wide austerity regime A; my best guess for A is roughly
15%, or 0.15.
So the next question is — what is the probability of Grexit, any time soon? That’s really two
questions. First, what is the probability of Grexit if there’s Europe-wide austerity. Let’s call
that B, and I’ll peg it at 85%, or 0.85. Second, what’s the probability of Grexit if Europe-wide
austerity slips a bit? We’ll call that C, and I’ll say it’s 65%, or 0.65. Overall, we can define the
chance of Grexit, D, as A * B + (1-A) * C. If you’re playing along at home, that’s 0.68, or
68%.
But just because Grexit happens, doesn’t mean it will necessarily affect the US election. For
one thing, by definition, Grexit can’t affect the US election if it hasn’t happened by the time
the election takes place. So the next question is: if there’s Grexit, what are the chances that
it will happen by November? The Europeans have proven themselves very good at kicking the
can down the road, so even if Grexit is inevitable, it’s still not inevitable by November. In any
case, let’s define E as being the conditional probability of Grexit by November, given Grexit.
I’ll say that’s 50%. Which means that the overall probability of Grexit by November, F, is D *
E, or 34%.
Grexit, if and when it happens, will cause a lot of disruption in European markets, and certain
deposit flight out of Spanish and Portuguese banks. Again, there are two ways this can play
out. Either it will cause a series of further dominoes to fall, or else it will concentrate the
Europeans’ mind and force them to build a large and genuinely effective firewall, drawing a
line in the sand and saying “this far, but no further”. Will Europe let the Grexit crisis go to
waste? Let’s say the probability of a credible, coordinated and constructive pan-European
response to Grexit is G. Then the probability of Grexit causing a big European crisis is 1-G.
What’s G? That’s a tough one, but I’ll put it at 35%.
For the purposes of this calculation, we’ll assume that Greece alone is too small to cause a
big global crisis: you need contagion, for that. So we’re looking for H, the chance of a big
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