We’ve all heard of the butterfly effect – the metaphorical example of chaos theory that says the fluttering of a butterfly’s wings can cause a hurricane halfway around the world. In this day of wide-scale globalization, it is no surprise then, that an economic flutter of actions in one corner of the world can have far-reaching consequences for people, industry and nations elsewhere.
Here in the U.S., we know all too well about the devastating impact that subprime mortgages and the resulting bank failures had on our economy in 2008-09. Home foreclosures soared alongside record unemployment and the term “government bailout” became part of our everyday lexicon.

Now, seven years later, the U.S. economy has, for the most part, picked itself up and dusted itself off, bouncing back slowly with consistent market growth, rebounding home sales and gradually decreasing unemployment. Our neighbors across the Atlantic, however, have not been as fortunate and several continue to feel the pains of an economy in crisis.

The “fluttering wings” of the U.S. Great Recession catapulted many EU member states into a deep, unrelenting recession with the same dire consequences felt over here. But unlike in the U.S., when the credit crunch spread overseas, the resulting lending losses, falling home prices and rising yields created an investment vacuum that left many member governments facing escalating debts along with plummeting GDPs.

Some EU countries, such as Germany – whose bonds continue to be a safe haven for investors – and the UK, whose debts have risen but whose bond yields have remained low enough to still be considered safe, have managed to weather the European economic crisis better than others. In the UK, for instance, the Bank of England can choose to step in and back investments should the need arise. Unfortunately, many EU countries, particularly those which had shakier economies to begin with, have not fared as well. Cyprus, Greece, Hungary, Ireland, Latvia, Portugal, Romania and Spain have each participated in some form of assistance, repayment monitoring or Economic Adjustment Programme with the EU and International Monetary Fund (IMF).

Greece, whose economic challenges predate the 2008-09 meltdown, continues making headlines for coming perilously close to sovereign default. That threat continues to loom large despite ongoing loans and efforts to create restructuring deals that would enable Greece to receive the additional assistance it needs to remain solvent.

Finance Professor Jeff Born at D’Amore McKim School of Business at Northeastern University explained that, following the January 2015 elections giving the radical left Syriza party majority control, “the prospect of the Greek government defaulting on its debt rose significantly.”

As Syriza campaigned against debt refinancing terms, “Greeks responded to the call to end austerity programs that were among the conditions imposed by lenders for attaining fresh financing,” Born said, adding that “a Greek default may give the new government a short-term boost in popularity, but the long-term consequences for the Greek economy are likely to be dire. Without an ability to borrow funds, the Greek government would have to balance its budget. The Greek government is running a deficit in excess of €22 billion, which is over 12 percent of the GDP, and this adjustment would have a massively negative impact on the Greek economy.”

Germany, who has invested over €56 billion in Greek aid, has taken the hardline stance that Greece must comply with strict fiscal reforms before any additional funding will be provided. “These austerity programs have made Germany (and the prior Greek government) unpopular with Greek voters,” Born said. “Ultimately, Greece's problems are of its own creation. Blaming the lenders won't solve the Greek government deficit, and that is what needs to be addressed.”

While the standoff over compliance continues, Greece faces the inability to pay €950 million due to the IMF in May. Repeated pleas for postponement of IMF payments and release of €7.2 billion in additional Eurogroup bailout aid are being met with frustration caused by Greece’s unwillingness to comply with the terms imposed as part of their restructuring agreement. Both Germany’s finance minister Wolfgang Schäuble and European Central Bank’s president Mario Draghi recently spoke out, saying that Greece’s fate was in their own hands.

Albeit unpopular, tough reforms need to be implemented immediately if Greece wants to continue with bailout negotiations. As of yet, however, Greece’s left majority has failed to comply with the reforms outlined in a comprehensive deal agreement made in February.

Resolution was still not yet reached at the April 24 Eurogroup meeting, where Finance Minister and Europgroup president Jeroen Dijsselbloem said, “Over the past few weeks, there have been intense discussions between the Greek authorities and the institutions. I understand that there have been recently some positive signs, but there are still wide differences to cover and to bridge on substance.”“We are all aware that time is running out. Too much time has been lost in the past two months. It is therefore clear that these discussions need to make significantly more progress, so that the institutions can give their green light on the comprehensive package which will then go to the Eurogroup for the political decision. The responsibility for that lies mainly on the side of the Greek authorities. Finding an agreement is first and foremost in Greece's interest.”

Following a meeting between German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras, Merkel – who was reluctant to divulge details of the meeting – was quoted as saying, “We have to do everything to avoid [Greece running out of money].” 

Speculation has ensued about Greece withdrawing from the euro, with experts weighing in on both sides. The primary advantage for Greece would be that its government would once again be able to print its own money and not be beholden to the lending terms Syriza opposes; however, the overall consequences of such a move could, according to some analysts, be more disastrous to the global economy than a sovereign default. 

While sovereign defaults have happened, Born reiterated that the probability of a true default is rare. “Most governments do not entirely repudiate their debt, but investors can lose a substantial amount of their original investment as part of a restructuring – something that has already occurred for Greek bond investors. There is no necessary reason why a partial default of the Greek government would lead to a collapse of the European Union or the euro,” he said.

“Another partial default will have almost no sustained impact across the world (but it will impact the citizens of Greece),” Born added. “A complete repudiation could have a small snowball effect if banks hold Greek debt, and the total loss causes banks to go insolvent. The chances of this are rather small.” 

Despite the uncertainty surrounding Greece, Europe’s economy is taking baby steps toward recovery, with winter forecasts indicating growth for all member nations expected at rates of 1.7% in 2015 and 2.1% in 2016. Growth for the euro area is also positive at 1.3% and 1.9%, respectively.

Still, investors around the world are antsy. The Eurozone alone stands to lose close to €194 billion if Greece were to default. Here at home, investors are pulling back while waiting to see how things play out, once again sending the markets into a tailspin. U.S. Treasury Secretary Jacob Lew has urged Greece to reach a resolution as soon as possible, saying that a default is “something that the European and global economies don’t need – to have another crisis.”