Economists have been looking over the edge of Euro collapse for some time, competing, for instance, to see how the effects could be mitigated. Given that those deleterious effects might amount to an economic nuclear bomb ten times worse than the collapse of Lehman Brothers in 2008, that's no wonder.
The scenarios are mind-numbing. The collapse of most British, French and even German banks, and their effective total nationalisation. A deep renewed recession would ensue, much more frightening than the UK's current problems, amounting to the loss of five per cent of GDP. British exports and her stock market would probably plunge. There would have to be a new and unprecedented round of quantitative easing - money-printing by the Bank of England. Finance and trade for and in the developing world - just starting to power ahead - would dry up. The global depression would last for years.
Now of course banks and their economists issue these reports from their own perspective - and while fearing for their own jobs. Would UBS, for instance, survive the breakdown of Germany's financial structure in 'Latin' Europe? Could French and Italian banks look with equanimity on Spain or Greece leaving the Euro? No. They'd be hammered. So the rescue job is on - including frightening the horses as much as possible.
Plenty of monetary unions have broken up in the past and, though the short-run outlook would be incredibly bleak, growth would still resume in the long run. Argentina broke away from the dollar and defaulted from its debts in 2001. The Latin Monetary Union of the nineteenth century broke up and was reformed again and again. The Irish Republic broke its one-for-one link with sterling in the 1970s.
But all those changes came with big, big costs. Argentine savers lost all their money. The Latin Monetary Union was stalled at birth, and remained a common rather than a single currency due to political differences over the role of gold and the French Franc, and it was strained by a series of wars - including the Franco-Prussian War of 1870-71. The Irish currency fluctuated wildly against sterling during the 1980s. Those assertions of financial independence were no panacea. The problem, as Keynes of course had it, is that 'in the long run we are all dead'. Does anyone really think we can wait five to ten years for strong renewed growth? No, I didn't think so.
But one thing is sure - there would be vast costs to a Euro break-up, and Britain would also be plunged into a new and much deeper recession in the short run. Governments would fall. Britain's Coalition would come under immense strain. It would be extremely unlikely to win the next election - which depends critically on economic recovery, of some sort, and at some point, in the next eighteen months to two years.
Conservative Euro-sceptics currently licking their lips about the collapse of the Euro: be careful what you wish for!
