Europe Economy

Why Greece Is too Small to Fail

Steve Sedgwick|CNBC Anchor

We've all heard the "domino theory" of why we can't ignore the economic woes affecting countries such as Greece.

The fear is that if you let a Greece-like country fail then international speculators will bring that economy to the brink and then move on to the next prey, like a plague of locusts.

To use another analogy, it's like the Little Dutch Boy who prevented the bursting of the dyke by swiftly putting his finger in the hole of it when he saw a trickle. With swift action on lesser problems, greater disasters can be averted.

But isn't it more simple than that? Isn't the real question "why not save Greece?" After all, isn't it too small to fail"?

Why EU leaders would risk the whole European integration project for the sake of an economy that accounts for only a couple of percent of total gross domestic product is beyond me.

Surely even the most hard-line of EU leaders are not blind to the fact that if Greece goes over the cliff then there will be other targets for the markets. Targets such as Portugal, Ireland, Spain and non-euro-zone countries like the U.K.

So why is the EU so "publicly" determined to leave Greece to its own fate while calling it "absurd" to even contemplate pulling out of the euro zone? There are at least three reasons for this rhetoric. Call it brinkmanship if you like.

One, the EU is angry with Greece NOT because its economy has slumped into a huge 12.7 percent budget deficit, but because it did so with stats that no one realized until recently were completely unreliable.

I mean, if we beat up on every country that had a big deficit then which country would escape a ticking off? I'm scratching my head. There seems to be some Brussels-based mantra that Greece must be punished for its statistical misdemeanors and profligate spending.

Secondly, and perhaps more importantly, EU authorities are playing a game of chicken with the financial markets.

There is an assumption, and we could all be wrong on this one, that the EU will come riding to the rescue at the last moment and save Greece. They may dress up the aid as "stability loans" or something more subtle, but the rescue will come. And yet you can't let the markets know that too soon or the game is up.

The markets mustn't become complacent that safety nets are as implicit as they were for the banks in the bad old days of 2008, 2009 and now, for that matter. I don’t know who’s in the Friday night poker club in Brussels, but the EU knows showing your cards too soon seems a forlorn strategy.

Finally, the EU is keen to appear in control of its own patch for fear of losing international kudos. Every time the possible intervention of the IMF is mooted you can audibly hear the wincing in Brussels.

Can you imagine the ignominy of a member of the great European convergence project having to go cap in hand to the IMF? A PR coup for the IMF would be a disastrous admission of failure for the EU. No, despite the noise that Greece is on its own, it's not. The EU knows it, the markets know it and maybe even the Greeks know it.

After all, if you are deemed "too small to fail" then why let the dam burst break and flood the whole valley?