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Unemployment threatens post-Grexit Europe

A report from the UN International Labor Organization predicts a major spike in German unemployment should Greece leave the eurozone. But economists question just how badly a so-called 'Grexit' would affect Germany.

As parliamentarians across Europe wrap up their summer vacations and prepare to return to the halls of power, the headlines are still full of the unsolved euro crisis. Political leaders in Germany have been able to look at the effects of the crisis in Greece, Spain and Italy without having to be too worried about the reactions of their home constituencies. Germany, by and large, has been spared the worst of the euro crisis and even been called an "island of the blissful" as it continues to export goods and keep unemployment down.

But a forecast by the United Nations International Labor Organization (ILO) could spoil politicians' reminiscing over beach vacations when they get back to work. The organization published a study showing the effects a Greek exit from the eurozone would have on Germany, which include a jump in unemployment from the current 6.8 percent to 9 percent in 2014, according to Ekkehard Ernst who heads the ILO's Employment Trends Unit.

"Even if it does not come to Greece leaving the euro and things continue as they are, unemployment will still increase to 8 percent," he told DW, explaining that the jump would be due to an overall worsening of the economy.

A soccer fan with a Greek flag painted on her face Photo: EPA/VASSIL DONEV

No one knows exactly what would happen if Greece left the eurozone

Hard to predict

That's a prediction that Andreas Sachs, a macroeconomist at the Center for European Economic Research in Mannheim, said was too pessimistic.

"Overall I find it rather difficult to make a forecast for such a long period of time," Sachs told DW. "There are demographic changes in Germany that are having - and will continue to have - major effects that definitely need to be included in calculations."

Florian Toncar, deputy head of the parliamentary group for the free-market liberal Free Democratic Party (FDP), which is a junior member in Germany's federal government, also said he doubted the ILO's figures.

"There is not a serious way to calculate the tenths of a percent of unemployment ahead of time," he said.

Enzo Weber, head of Forecasts and Structural Analyses at the Institute for Employment Research (IAB) in Germany, also disputed the effects of a Grexit, or Greek exit from the eurozone.

"Economically, it would not be a catastrophe for Europe," Weber said. "Greece would not cause a dramatic increase in unemployment."

Greece's economic importance

Experts have largely agreed that Greece is only moderately important to the overall German and European economies. With a gross domestic product about equal to that of the German state of Hesse, it's the political effects of a Grexit, rather than the economic ones, that have most experts worried.

Photo: DW

Economists wonder if it makes sense for Greeks to keep spending euros

"The problem would be the major loss of confidence that would find its way into European governments, and that would then lead to a direct increase in real interest rates in Germany," says Ernst from the ILO.

Macroeconomist Sachs agrees on this point. "A Greek exit would be accompanied by significant uncertainty in financial markets," he said, adding that such a scenario would again raise the question whether Italy or Portugal would also leave the shared European currency. "That means the sale of government bonds from these states would become a problem, leading to renewed austerity measures in these countries which, in turn, would almost certainly strangle their economies."

Sachs said he would not make a forecast about what might happen if the eurozone were to break apart completely.

"There would be economic consequences, also for the labor market, in particular because Germany is an export nation," he said.

If it were really to come to that and countries returned to their old currencies, then there would be deflation, warns the ILO's Ekkehard Ernst.  

"The value of the deutschmark would rise; we would not be able to sell our exports, and would have a surplus of goods. Prices would fall and people would not spend their money," he said, describing the downward spiral.

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