Why Greece’s economy should matter to everyone

Globe Staff And Wire Services / May 7, 2010

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Q. Why are US investors worried about the growing debt crisis in Greece?

A. Investors fear that Greece’s debt problems could spread to other European nations and ultimately damage the US economy. A weak European economy hurts American exports and the profits of US multinationals.

“Europe is a major trading partner of ours, ’’ said Peter Boockvar, equity strategist at Miller Tabak, “and this threatens the entire global growth story.’’

Q. Why is Greece in trouble?

A. Greece spent and borrowed too much in recent years as it rode a global economic boom. Once the global recession hit, Greece was left with heavy debts, a sinking economy, and no means to pay its debt. Greece must make a May 19 debt payment or default.

Q. What happens if Greece defaults?

A. Economists and investors worry the crisis could spread to other economically struggling European nations, such as Spain and Portugal, much as financial contagion spread through the US banking system in 2008. That could damage the financial institutions, primarily European, that hold this debt and spark another financial crisis.

“It feels like a whole set of dominoes,’’ said Simon Johnson, a professor at MIT’s Sloan School of Management and former chief economist at the International Monetary Fund.

Q. Is anything being done?

A. The Greek Parliament approved an austerity package as a part of bailout deal with the European Union and IMF. But coordinating efforts is tricky. While Europe has a single currency, it has many national governments, each dealing with its own domestic politics. For example, German leaders, in the face of angry voters, have been reluctant to support bailout plans, shaking confidence that the situation can be resolved.

“Who’s in charge?’’ asked Nariman Behravesh, chief economist at IHS Global Insight in Lexington. “The policy response has been awful. This is Europe at its worst.’’