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EMU Break-up
Pay Now, Pay Later
Europe’s monetary union (EMU) now faces make or break. Key aspects of the break-up scenario that we quantified in a report last year* are already being played out the financial markets. Amid political bickering and delay over the
how to stem the Eurozone bond sell-off, the real economy is paying an increasingly heavy price. The paradox of Merkelism is that the core countries’ attempts to limit their exposure are increasing it. But even as the cost of sustaining EMU in its current form mounts, our updated estimates presented here suggest that the impact of exits or break-up would be far costlier.
As the Eurozone stares recession in the face, the Eurozone’s debt crisis is inflicting growing economic and political damage. Even past supporters of EMU are toying with the
idea that the price of sustaining it in its current form may simply be too high. Governments in the periphery have all fallen as harsh fiscal austerity kicks in. Those in the core are in trouble too, as their electorates balk at the idea of having to dig in even more deeply into their pockets to pay to prevent EMU from falling apart.
Once again our purpose is not to assess the probability of EMU break-up, but its impact.
Calibrating the impact remains challenging, but it is now essential to make informed
investment decisions. We evaluate two boundary cases: a Greek exit and a complete
break-up. Although there are many permutations in between, our results should give
some indication of their potential impact as well.
Our revised estimates show even bigger damage on the Eurozone and global economy.
In our complete EMU break up scenario, the cumulative loss of output in the Eurozone in
the first two years is over 12%. This is substantially greater than the losses that followed
the demise of Lehman Brothers in September 2008. The complexity of financial and trade
inter-linkages are such that the short term consequences would be traumatic. In the first
year, Eurozone GDP might fall by 9%. Indeed, these short-term losses would cause
lasting damage to growth potential in subsequent years. Even by 2016, output in the
Eurozone might be some 10% below where it would otherwise have been.