Amid continuing wrangling over a European rescue of Greece and threats about forcing the debt-strapped nation out of the euro, UBS has issued a research report warning a Eurozone is “virtually impossible” and risks devastating economic and even military consequences.
In its paper released Tuesday, UBS Investment Research says “popular discussion of the break-up option considerably underestimates the consequences of such a move,” giving the chances for dissolution of Europe’s monetary union “close to zero probability.”
The reasons UBS analysts Stephane Deo, Paul Donovan and Larry Hatheway cite are both economic and political. Economically, the costs are simply too great to bear, amounting to 40% to 50% of GDP in the first year for a weak country and 20% to 25% of GDP in the first year for a strong Eurozone country. Costs in subsequent years would be lower, though still formidable.
For a weak country, UBS says “consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance.” The consequences for a stronger country like Germany would include “corporate default, recapitalization of the banking system and collapse of international trade.”
UBS says the cost of a German exit from the euro would be magnitudes greater than the cost of an outright bailout of Greece, Ireland and Portugal, which UBS estimates to be 1,000 euros for every German adult and child, in a single hit. In contrast, the cost per German of a euro exit would “be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter.”
But the UBS analysts call shaving off a quarter to half of GDP from weak and strong Eurozone countries “the least of the concerns investors should have about a break-up,” noting that “almost no modern fiat-currency monetary unions have broken up without some form of authoritarian or military government, or civil war.”
The authors cite Slovakia as a recent case where political rights and civil liberties deteriorated after the breakup of the Czechoslovakian monetary union in 1993. “Similarly the break-up of the Soviet Union saw authoritarian regimes in the resulting states,” they add. Perhaps most surprisingly, the UBS analysts cite a little known U.S. precedent:
“Even the U.S. monetary union break-up in 1932-33 was accompanied by something close to authoritarianism. Roosevelt’s inauguration was described by a contemporary journalist as being conducted in ‘a beleaguered capital in wartime,’ with machine guns covering the Mall. State militia were called out to deal with the reactions of local populations, unhappy at what had happened to the monetary union (and specifically their access to their banks).”
The authors provocatively state at the beginning of their lengthy report that “the euro should not exist,” saying the currency creates more “economic costs than benefits for at least some of its members” and that politicians ignored the obvious dangers of integrating economically non-homogenous member countries. Unhappy as the European monetary union currently is, the UBS report suggests that a deepening of their confederation through fiscal union is necessary and likely.