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Greece's Exit From The Euro Zone Approaches, While Europe Fiddles

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A Greek flag flies next to a statue of ancient Greek philosopher Socrates in the center of Athens on 23 May, 2012. European leaders are considering the repercussions of Greece leaving the euro zone.
A Greek flag flies next to a statue of ancient Greek philosopher Socrates in the center of Athens on 23 May, 2012. European leaders are considering the repercussions of Greece leaving the euro zone.

Europe and Greece are at the stage in their stormy marriage where they are consulting with divorce lawyers. And we may all feel the pain of their breakup.

On Thursday a Markit Economics index tracking European service-sector and factory activity in May tumbled to its lowest level since June 2009, suggesting a deeper economic contraction. A separate Markit index of German factory activity also tumbled, as did an Ifo Institute index of German corporate confidence, both suggesting the core of the European economy is suffering, too.

Meanwhile, new public polling in Greece showed the anti-austerity Syriza party gaining more support than ever ahead of elections scheduled for June 17 -- even as 85 percent of Greeks polled said they wanted the country to stay in the euro zone.

A formal European summit is scheduled for the end of June, several days after the Greek election. Many observers fear that, by then, it will be too late for decisive action to keep Greece in the euro zone.

The euro fell on Thursday to $1.253, its lowest level in nearly two years. But European stocks rallied, in part on a hope that the European Central Bank will come to the rescue with rate cuts and fresh support for struggling sovereign debt. Germany's DAX index edged up by about 0.5 percent, while France's CAC 40 rose 1.2 percent.

U.S. stocks edged higher, too, after rebounding from a sharp decline on euro-zone worries on Wednesday. As with the European stock bounce, the U.S. stock recovery seems also to be fueled in part on hopes that the Federal Reserve will step in and save the day.

It seems likely that financial markets "have simply not taken break-up risks very seriously," Capital Economics economist Jonathan Loynes wrote in a note on Thursday.

The ECB might need to do quite a lot of heavy lifting in the event of a Greek exit: Greece would almost certainly default on its debts upon leaving the common currency, and the rest of the euro zone would be saddled with hundreds of billions of dollars in losses, Reuters writes.

And even then, Europe's problems would only be beginning. Spain and other, larger European economies have debt trouble of their own that would be worsened by the Greek exit, making them even more inclined to follow Greece's example. The very existence of the euro zone would then be in doubt.

In the Wall Street Journal, David Wessel lays out the very specific ways that a messy Greek divorce will impact the U.S. economy, too. We'd better get ready, writes the Journal's Paul Vigna -- this appears to be the start of the endgame.

The repercussions are already being felt in China, whose economy relies in part on exports to Europe. A closely watched Chinese manufacturing index fell in May and showed factory activity shrunk for the seventh straight month, Reuters reported.

European leaders did little but bicker at an informal dinner summit in Brussels on Wednesday, The New York Times writes, even as financial markets were roiled by the potential damage that could be caused by Greece leaving the euro zone.

Leaders left their dinner mumbling support for the idea of Greece staying in the euro zone, but also said they were developing contingency plans for its eventual exit.

But they are not yet doing much to prevent it.

Around the Web

Eurozone looks at Greek exit as leaders meet - Yahoo! News

Eurozone To Members: Prepare For The Possibility Of Greek Exit

A Greek Exit? Euro Zone May Be Ready - NYTimes.com

Should Greece leave the euro zone and return to the drachma ...

BBC News - How would Greece leave the euro?

Why Greece Needs to Leave the Euro Zone - SPIEGEL ONLINE

Eurozone debt crisis: how a Greek exit from the euro might unfold ...

Eurozone governments ponder Greek exit contingency

Insight: Greek exit could cost eurozone hundreds of billions of euros

Greek Exit From Euro Could Hit Europe, China's Exports - IMF China Rep

CREDIT MARKETS: Possible Greece Euro Zone Exit Captivates Markets

Spain, Italy insurers exposed to Greek exit -Fitch