The Financial Times – The terrible consequences of a eurozone collapse
What happens if the euro collapses?
A euro area breakup, even a partial one involving the exit of one or more fiscally and competitively weak countries, would be chaotic. A full or comprehensive break-up, with the euro area splintering into a Greater Deutschmark zone and about 10 national currencies would create pandemonium. It would not be a planned, orderly, gradual unwinding of existing political, economic and legal commitments. Exit, partial or full, would likely be precipitated by disorderly sovereign defaults in the fiscally and competitively weak member states, whose currencies would weaken dramatically and whose banks would fail.
If Spain and Italy were to exit, there would be a collapse of systemically important financial institutions throughout the European Union and North America and years of global depression.
Looking at the chart of the euro above, we can’t help but notice a complete lack of trend one way or another. Given all the stress in Europe, it is amazing that the currency is relatively unchanged on the year. After all, the Intrade.com markets are pricing in a 63% chance that at least one country drops the euro by the end of 2014. So why hasn’t the currency dropped appreciably in anticipation of such an occurrence?
The problem with this line of reasoning is that nobody knows what a “new euro” might look like. Will countries such as Greece be kicked out of the euro, leaving a currency that more closely resembles the old Deutsche Mark? This would likely result in a rally. Or, will Germany and their more fiscally sound counterparts exit the euro, leaving the PIIGS to fend for themselves? Barring a historic precedent for such a dismemberment, nobody is entirely sure what the euro might look like in such an event. Until leadership in the EU resolves these issues, we would not be shocked to see the euro continue to trend sideways as it has most of this year. Will the summit currently underway provide any of these answers? Tune in tomorrow to find out.
Source: Arbor Research
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