The Bank of International Settlements estimates that the European Union is sitting on at least $70.0 Billion Dollars of Greek Debit. The European Union with an estimated combined GDP of $16.2 Trillion Dollars appears to be formidable, and on the surface should be able to handle this loss. But this debt under the current rules for European Banking allowed that no reserves be held again these assets, the are supposed to be "SAFE". Shades of the scene in "The Marathon Man", where the question is "Is it Safe?" Assuming a 10 to 1 leverage ratio, the EU should be surprised to see at loss of at least 700 Billion Dollars. If there is a Haircut, it might be less. If the banks are operating at a higher leverage ratio, it could be worse. If it is an outright default it will be as if 2.4 year of EU GDP growth just disappears over night. The European, if not the worlds financial system will go solid, no one will lend anyone any money at anything approaching a normal rate. The LIBOR spread, will be more of a wall. Trust will, liquidity will gush out of the system. Other nations, in the same pit, will give more consideration to the path just taken by the Greeks.
I know that I am not able to describe the emotional carnage that will occur to the millions of individual who through no fault of their own will have to suffer through aftermath of this event. The destabilizing effect will not be just confined to Europe. The rest of the world will be affected. This event will test the resiliency of every democracy.
The European Union will have to change or it will cease to exist. Individual in the know currently state that there is no “mechanisms” for countries to leave the Union. This fact will not stop any county from leaving. In countries where the majority of the population demands that their country leave the EU, they will leave the EU by fiat.
What is the European Union do? Invade them and force them back into the fold. The European Union does not have a standing military. The EU would have to ask their members nations to send their armies. The European Union could boycott the countries that wish to leave European Union, but the EU does not control the checkpoints at the borders, if there were checkpoints. The borders are controlled by the member nations custom and police forces. The members of the European Union are still sovereign nations, and as such still retain all of the instruments of sovereign nations. The members of the EU are not states that have succumbed to a federal power either by declaration or force. At best the EU is a confederation, and not a very cohesive confederation. This debt crisis is the first real test of this confederation, since it involves something near and dear to nearly everyone, MONEY.