Europe's single currency is in crisis, and businesses need to prepare for the worst. A new report by the Economist Intelligence Unit looks at the risks of a break-up in the euro zone, and explores the potential consequences for Europe and the world.
The report, After €urogeddon? Frequently asked questions about the break-up of the euro zone, starts with the premise that European policymakers—for all their highly publicised differences—will do just enough to save the single currency. The Economist Intelligence Unit attaches a 60% chance to this central "muddle through" scenario. However, at 40%, the chance that policy will fail, and that the monetary union will fracture in some way, is too high to ignore. The bulk of the report delves into the implications of this latter scenario. In FAQ format, it answers 17 questions about the likely extent and impact of euro collapse, and about the contingencies businesses should be thinking of in order to protect themselves.
"The financial crisis that followed the collapse of Lehman Brothers in 2008 caught people unawares," says Charles Jenkins, editor of the report. "If the euro zone fractured, the turmoil in Europe could well surpass the post-Lehman meltdown, while the consequences for the rest of the world would also be grave. Organisations need to know what a break-up of the euro could mean for their product markets, for their access to finance, and for the overall economic climate."
Predicting the future of the currency union and anticipating what "break-up" would mean in practice is complicated by the fact that the creators of the single currency allowed for no such eventuality. There is no formal mechanism for a country to be expelled from the euro zone or to leave of its own volition, which suggests that any break-up would be extremely messy. The Economist Intelligence Unit's report addresses many of the key uncertainties, from how many countries might leave the euro—or stay within it—to what could be expected in foreign-exchange and export markets. The most likely permutation would involve weak "periphery" countries, including Spain and Italy, breaking off individually to leave a northern "rump" of stronger economies within a smaller currency union.
Specifically, some of the questions that the report addresses are as follows:
- What would be the likely trigger for a country leaving the euro?
- Could a country default and stay within the euro?
- Would an exit by Greece cause other countries to leave?
- What would be the economic impact on countries leaving the euro?
- What would be the impact on global financial markets?
- What would happen to countries that stayed within the euro?
- Would a global recession be inevitable if the euro collapsed?
- What would happen to banks in countries that left the euro?
- What would happen to sovereign debt?
- What should businesses do now?
After €urogeddon? Frequently Asked Questions about the break-up of the euro zone is available at www.eiu.com/eurozonebreakup
