World Economy May Hang on Greek Election

iStockphoto/Thinkstock(NEW YORK) — Greece will be the focus of world attention as Parliamentary elections are held on Sunday that have the potential to determine the future of the European currency, further unsettle international markets and even spark a new global financial crisis and recession.

The outcome of the election will be a defining moment in Europe’s debt crisis. It will decide whether Greece gets a government that can strike a deal with the European Union and International Monetary Fund on easing the terms of its bailout deal. International lenders will have to decide how far they are prepared to go to in helping Greece. So far, Europe’s strongest economy and biggest lender, Germany, has said that Greece must stick to the austerity measures it agreed to.

The worst-case scenario is that if no agreement is reached, Greece may not get the bailout money it so desperately needs to stay afloat. If it defaults on its debts, many analysts believe Greece will have no choice but to leave the euro currency.

Such an outcome would be uncharted territory. There are no provisions in European law for a country to leave the currency, and no one really knows exactly what would happen. Capital controls, like freezing bank accounts and sealing the country’s international borders, might be implemented, because many Greeks would likely withdraw their euros before bank holdings are changed into a new currency that will immediately lose value, and even try to move their money outside Greece. The social cost could be devastating. The country could struggle to finance the import of basic necessities, such as food, energy and medicine.

Ever since the possibility of a Greek exit from the euro was raised, governments and businesses have been trying to figure out what would happen next. Britain’s finance minister said on Wednesday that a Greek exit may be the price that has to be paid to persuade Germany to do whatever it takes to ease the debt crisis. Moritz Kraemer at Standard & Poor’s Ratings Services says that the chaos of a Greek exit would likely strengthen the resolve of other struggling European countries to pursue reforms, and for stronger economies to do more to help.

Not everyone is so optimistic. Others believe that once the threshold of a Greek exit has been crossed, the whole situation could potentially quickly unravel because of a contagion effect. They say that the financial markets and banking systems of other vulnerable economies, like Cyprus, Ireland, Portugal, Spain and possibly Italy, could be next in the firing line. They may no longer be able to borrow from nervous investors, and big economies like Spain and Italy may also need bailing out. In addition, banks across Europe that lent to those countries would be in big trouble.

Whatever happens in Greece and the rest of Europe, it’s sure to have an impact on the economic recovery and financial stability in the United States. The U.S. and the European Union have the largest trade and investment relationship in the world. The value of the two-way transatlantic flow of goods, services, and income receipts from investment totaled more than $1.5 trillion in 2010, according to the Congressional Research Service. U.S. and European companies are the biggest investors in each other’s markets: total stock of two-way direct investment came to about $3.4 trillion at the end of 2010. Transatlantic economic activity provides an estimated 15 million jobs in the United States and Europe.

That’s why President Obama will be talking about the Greek election on Monday morning when he meets with the leaders of G20 nations in Los Cabos, Mexico.

Copyright 2012 ABC News Radio