That is the question Citigroup tries to answer in a new note. The bank’s forecast is global depression and possibly war. But lawyers would do OK. More from Citi economist Willem Buiter (bold for emphaisis):
1. A break-up of the Euro Area would be rather like the movie ‘War of the Roses’ version of a divorce: disruptive, destructive and without any winners. A break-up of the 17-member state Euro Area, 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 DM zone and around 10 national currencies would create financial and economic pandemonium. It would not be a planned, orderly, gradual unwinding of existing political, economic and legal commitments and obligations.
2. Exit, partial or full, would likely be precipitated by disorderly sovereign defaults in the fiscally weak and uncompetitive 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. Even if the likelihood of an eventual exit or break-up were to be assessed accurately by the markets – something for which there is preciously little evidence – the timing of any exit or break-up is bound to come as an unexpected and deeply disruptive event.
3. A disorderly sovereign default and EA exit by Greece alone is manageable. Greece accounts for only 2.2 percent of EA GDP and 4 percent of EA public debt. However, a disorderly sovereign default and EA exit by Italy would bring down much of the European banking sector. Disorderly sovereign defaults and EA exits by all five periphery states – an event to which I attach a probability of no more than 5 percent, would drag down not just the European banking system, but the north Atlantic financial system and the internationally exposed parts of the rest of the global banking system as well. The resulting global financial crisis would trigger a global depression that would last for years, with GDP falling by more than 10 percent and unemployment in the West reaching 20 percent or more. Emerging markets would be dragged down too. Even the limited financial turmoil emanating from the Euro Area thus far has contributed to the marked slowdown of growth in the world’s three most important emerging markets – China, Brazil and India.
4. Exit by Germany and the other fiscally and competitively strong countries would be possibly even more disruptive. This might occur if there were attempts to introduce a one-sided fiscal union with open-ended and uncapped euro-bonds or other transfers from the strong to the weak without a corresponding surrender of fiscal sovereignty to prevent future crises or if the ECB were to ‘go Weimar’. I consider this highly unlikely, with a probability of less than 3 percent. Following the exit, Germany and the other core EA member states (perhaps excluding France) would introduce the new DM. The sovereigns in the periphery would default. The new DM would appreciate sharply. Financial institutions in the new DM area would have to be bailed out because of losses from exposure to the old periphery and the soft core. As nothing holds the remaining EA countries together, the rump-EA splits into perhaps 11 national currencies. The legal meaning and validity of all euro-denominated contracts and instruments is up for grabs. Everyone, except lawyers specialising in the Lex Monetae, becomes much poorer as business is put on hold while the mills of the courts grind slowly.
5. Even if the break-up of the EA does not destroy the EU completely and does not represent a prelude to a return to the intra-European national and regional hostilities, including civil wars and wars, that were the bread and butter of European history between the fall of the Roman empire and the gradual emergence of the European Union from the ashes of two made-in-Europe world wars, the case for keeping the Euro Area show on the road would seem to be a strong one: financially, economically, and politically, including geopolitically.
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I was looking for more up 2 date news, as france will soon lead the way to ending this dead-lock with the debt owed to the european (german) banks. Socialism has,nt failed as certain parties mock our cradle to grave care. Its just been exploited and the real scheme behind how we,ve gotten here can never be explained, but we do know in which direction this european nestegg went. Chaos has been created and this is just the start,our structure and rules are being turned on us. the last epidemic that never happened made a handy bundle for a pharmacutical company(american?). everything here in Dublin has changed, most people don,t want to really acknowledge the true mess we,re in, the figures are just incomprehensible. I think we,ve been attacked and its time to stop being so predictable. I would love to hear back from anyone, with any ideas, not nessesarily aggreeing with mine.. truth seeker
@Palumbo.
One of the anchors of corrective lending policy is that banks, such as the European Central Bank, “lend freely, but at a penalty rate”. 1% really does not seem like enough of a penalty rate that would result in a positive outcome. The lack of a “penalty rate” is one of the major mistakes that the FED made rebounding from our own 2008 financial collapse.
The best solution is for Italy and Spain and others to make an offer to lenders to repay the loans and have the interest rate fixed at 1% for 15 years. Otherwise these countries should default and revert back to their older currencies. It would cause some pain to rich greedy bank shareholders but it would free up a huge market and create a lot of employment and exports. Italy is ready with millions of small businesses, lots of export companies, fantastic fashion labels, cars, jewelries and high quality furniture plus food, hand bags , shoes, the churches and paintings and more. The new Italian government should expropriate the media companies now owned by Berlusconi and News Ltd and divide them in hundreds of pieces. Also expropriate all the assets of tax evaders unless they pay all the taxes due and come clean. Sell off most of the government’s assets to cooperatives and likes. Italian’s exports would be cheaper and tourists once again could enjoy the country at a cheaper rate. Why go to Italy now when it is so expensive. A cup of coffee in Venice cost me >AU$10. #@$@#@.
Italy now allows any businesses to opt out of the industrial laws and do whatever they like.
I would like to see Italians go back to more education, more research and more art and a cohesive society without does old fucky daddies.
Let the younger generation take control of Italy now.
Long live the lira and a new Italy and the anarchy that prevails.
Hmm, exactly what somebody would WANT if they wanted to throw out the “system” and replace it with a New World Order. Anybody out there wanting just that?
Yeah, Soros (and O’bummer) and a lot more have expressed a desire for just that over the decades. Only problem, it would be a FASCIST state!
yes the system needs to be broken down. Capitalism as we know it is over. Let’s go with a small c.
Capitalism was scarcely involved. What failed was the absurd cradle-to-grave welfare states. Is it any surprise that the collapse emanated from countries with miniscule economies but social benefits matching the major economic players?
Foreclose on the PIIGS and sell them off piecemeal. Perhaps they can continue as resorts for more functional nations.
+1
Let’s see… social unrest, currency collapse, global depression that spreads to all developed nations like the black death punishing millions of the most vulnerable (aka debtors) in the (formerly) rich countries… sounds like on the back end (in whatever decade that might be) it might be cost effective to manufacture in the U.S. again (or at least in the country formerly known as the U.S.)
Holy moly, who needs a “jobs bill” when ya got this!