05/18/2012 09:25 am ET Updated Jul 18, 2012

Greece and the Eurozone: What to Expect When You're Expecting the Unknowable

More out there today on the possibility of Greece leaving the Eurozone. The New York Times is a bit less pessimistic than the Washington Post, but if you're looking for something new to get nervous about, here you go. Better yet, I'll summarize: we don't know the outcome, but it will be ugly. Of course, it's already ugly, and that's worth remembering.

In terms of global reverberations, investors from other countries have been pulling out of Greece for a while. Claims by foreign banks in Greece are now down to below $100 billion, compared to $600-700 billion in Spain and Italy. From the Washington Post:

Of the country's $430 billion in outstanding public debt, well over half is owed to the International Monetary Fund, the European Central Bank and other European institutions. The original worry -- that French and German banks might fail because of large holdings of Greek bonds that might not be repaid -- has been largely erased. Over the past two years those bonds have been sold or the losses on them absorbed when the debt write-down occurred this year.

History also has favorable lessons of countries that decoupled from a currency peg and did a lot better than everyone expected, with Argentina the most recent example. After a period of indebtedness and IMF imposed austerity, they broke their dollar peg in 2002 and defaulted on their debt. Their economy suffered deeply for about a year, but the upside was they could now devalue their currency. That helped to set off a solid growth phase, as the Argentine economy grew over 8% per year over the next six years, employing human and physical capital that had been sitting idle during the austerity years. Sound familiar?

But the risks here are great and, of course, go well beyond Greece. If global capital decides that bigger, more connected countries like Spain and Italy are next to leave the zone, it will be up to the European Central Bank and the Germans to support them, and Paul Krugman, for one, isn't optimistic.

As I noted yesterday, any disaster scenario of what might happen has to take account of the current mess, with punishing levels of unemployment, grueling uncertainty re what tomorrow holds, and the seeds of deep social unrest. There's no happy ending from where we are, and the idea that the euro should be protected at all costs heavily discounts those costs.

Which takes me back to my terse summary: we don't know how this bounces. It's good that exposures have been lessened, but over to big Ben (Bernanke) for the last word:

"If there is a major financial problem in Europe," Mr. Bernanke told Congress in February, "there will be so many different channels on which that will affect our financial system that I would not want to take too much comfort from" the fact that the financial system has little direct exposure to Greece.

This post originally appeared at Jared Bernstein's On The Economy blog.