Panic shook markets on Tuesday, as a political fight in Italy caused one of its worst sales in the market in years. The underlying fear of investors was the prospect of Italy abandoning the euro and others following suit, which Blanchard, now an economics professor at the Mbadachusetts Institute of Technology, described as more of a psychological fear than a realistic threat.
The potential concern involves Italy's creditors, who would have to "move carefully," the economist told CNN's Joumanna Bercetche in Paris. The rest of Europe can avoid a domino effect, but Italy seems to be mired in a quagmire.
"I suspect that in this case the EU will do whatever it takes to avoid contagion, so I'm not terribly concerned about the contagion," Blanchard said. "I'm very worried about Italy, I'm not worried about the rest of Europe, it's going to be difficult, but the rest of Europe, the rest of the (euro) will be fine."