If the Greek problem blows up, other fragile players including Italy would come under scrutiny by investors who will doubt Europe's capacity to deal with problems and start to think "maybe there will be a problem in Italy that you cannot deal with."
A breakup of the eurozone would be catastrophic, not just for political but also economic reasons, Sapir warned. "Those who are advocating the breakup of the euro area do not understand what the consequences would be."
"Not just the governments but also the private sector would be insolvent. There will be a lot of insolvency and a lot of turmoil in the whole euro area and the EU. How would people in Greece, Portugal and Italy reimburse their debt in devalued currencies?"
"So, neither the Germans nor the Troika that are going to pull the plug. The ball would be in the court of Greece," Sapir said.
Fears have been lingering about the forthcoming Greek government reneging on their commitments to implement deeply unpopular austerity measures and structural reforms.
New Democracy party leader Antonis Samaras, who is currently the frontrunner in the Greek prime ministerial race, last month indicated that he would try to renegotiate the terms of the bailout, further sowing doubt in the minds of European leaders.
However, as Sapir pointed out, the Greek people seem to understand the catastrophic consequences of "managing the crisis on their own." A recent survey by pollster MRB showed 72.7 percent of Greeks want the country to stay in the euro.
Greek Prime Minister Lucas Papademos sounded an alarm in early February when he said: "A disorderly default would set the country on a disastrous adventure. The country would be drawn into a vortex of recession, instability, unemployment and protracted misery and this would sooner or later lead the country out of the euro."
"They understand, if they are to suffer, it is better to suffer inside the euro area than outside it," said Sapir. "Inside the area, they can get loans and negotiate the interest rates, something they won't be able to do outside the euro area."
Sapir added he does not foresee Greek people protesting on the streets demanding to leave the euro. "It is not difficult to paint a catastrophic scenario, but I don't see this particular scenario coming."
THE CARROT AND STICK METHOD TO SOLVENCY
In spite of its huge debt, currently at 160 percent of GDP, it is still feasible for Greece to be solvent so long as it can manage to grow, bit by bit, Sapir said.
"It's not like 120 percent is solvent and 130 percent is not. It is a question of being able to grow little by little out of your debt."
However, Greece's large external debt is a challenge, and the country as a whole has been living beyond its means, said Sapir, calling for either lowering the Greek people's consumption, increasing production, or both.
"I think it is feasible, and you have to give them time, and you have to motivate with carrots and sticks."
On the consumption side, standards of living should be lowered, he said. To this effect, the Greek parliament last month passed a slew of legislation to cut pensions, salaries of civil servants and the minimum wage in the private sector.
In the bargain, Greek authorities must ensure the burden of austerity is equally distributed." The pain is not viewed in Greece as being fairly distributed. Some people are taking a lot of the pain, while some others who have big houses and swimming pools are not," Sapir said.
This is all-the-more important to Greece, a country where "social cohesion is very poor and which has been politically, economically and socially very divided," he added.
In addition, where standards of living are falling, growth must be restored to give people hope.
"A lower living standard could be acceptable provided you are put in a system where growth is possible. What has been terrible is people seeing the economy falling over the last five years. That cannot continue," Sapir said.
On the production side, Greece must strive to upgrade and advance its industries, knowing very well it may not be realistic for the country to compete with Germany in this regard.
"Greece is not in the league of Germany, but at least they can be in the league of Czech Republic or other central and eastern European countries," Sapir said.
