Foreign and Defense Policy, Europe and Russia

And if the euro completely collapses …

A neat chart in The Economist summarizing some forecasts about the impact of a) an orderly Greek euro exit and b) a complete euro breakup. Here is a sketch of what happens if everything goes wrong:

If neither the rescue funds nor the ECB can do enough, a wider break-up might ensue, with huge costs all around. Mr Cliffe says that a disintegration of the euro would be catastrophic even for core Europe, with first-year output losses of 8.9% for the euro area (as was). This time Germany would not be spared, incurring a GDP loss of 8.2% as its exporters contended with the strength of a reborn D-mark. Across the former euro area, there would be a wave of bankruptcies as firms suddenly found themselves either owed money in a depreciating currency or owing money in an appreciating one.

Currency unions have cracked before, but none with the scale, ambition or interconnectedness of the euro area. Contemplating the dread consequences of such a disintegration may yet prompt concessions from both Greece and its creditors that prevent the worst happening. But can the level of fear be adequate to engender such a change of heart while not so powerful as to trigger panic? Again, the prognosis is uncertain.

So the worst-case scenario is a depression in Europe and something like a Great Recession 2.0 here in America.

I actually think that might not be the worst-case case scenario since it doesn’t seem to take into account the impact on China—the EU’s largest trading partner—which is already slowing.


One thought on “And if the euro completely collapses …

  1. I’m reluctant to accept the prophecy that Europe’s economy will tumble under either scenario…. I don’t recall any huge jump in Europe’s economy attributable to their adopting the Euro, so why the fall when they abandon it?

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