World Bank’s Zoellick: Eurozone Needs Funding For Reforms

World Bank President Robert Zoellick said if Greece leaves the eurozone, it would have “ripple effects” comparable to the collapse of Lehman Brothers in 2008.

The debt-ridden European country faces political economy questions, not simply economic issue, Zoellick said in a forum sponsored by the Economic Club of Washington, D.C.

The World Bank chief, however, contended the core question for Europe will not be Greece, but Spain and Italy. The Spanish and Italian governments are undertaking some “very difficult” fiscal reforms and structural reforms, which are key to future growth, the outgoing World Bank president told the audience.

“The danger for Greece is that if Greece does leave, frankly there has to be a lot of care taken to how that’s done,” Zoellick cautioned, adding that it makes him think of the fall of Lehman Brothers.

“Where the danger comes in is when events come, they start to affect confidence and you get illiquidity moments,” said Zoellick, who also believed the key issue the European countries have to come to terms with is “if you have medium-term reform, you need some sort of medium term insurance for investors.”

Zoellick said he doesn’t favor eurobonds all the time because it may loose fiscal disciplines on the states, but it can be used for a limited time. He also mentioned using the European Stability Mechanism fund to stabilize European economy, which he said, is more likely to happen.

Greece’s future in the eurozone was in doubt after political parties failed to reach an agreement on a governing coalition. The country’s political turmoil fueled fears among investors and caused large-scale deposit outflows from Greek banks since Monday, Xinhuanet reported.