Despite the distracting political drama over the UK’s outlier rejection at last week’s European Union agreement on fiscal and budgetary coordination, it’s now become clear that main objective of the collective effort–to ensure the survival of the euro, and more broadly bolster Europe’s economic outlook–has not been attained, and that the currency has won a short-term respite at best. So with the monetary chaos and European debt crisis still looming large and posing troubling questions, it would be unwise to ignore hypotheses now arising about what might happen if certain countries dropped out of the euro zone—or if the entire currency imploded. While that is still very much “what if” theorizing at this point, such a potential crisis is worth examining, if only to identify signs of what may await if things continue to deteriorate.
Tuesday’s New York Times continues its excellent coverage of Europe’s debt crisis by turning to Greece–the most weakened and vulnerable economy on the continent. It raises questions about the potential consequences of a return to the drachma. The picture isn’t pretty—involving bank runs, freezes on moving capital abroad, surging unemployment, rising prices and falling currency values, government default, isolation from international creditors and markets, and the sort of social and economic trauma and ruin associated with the Great Depression—or worse. “As the country descends into chaos,” the Times imagines, “the military seizes control of the government.”
Of course, the Times, isn’t saying a military coup is in the cards—just noting it wouldn’t be an impossible turn of events if things keep going wrong. But the mere evocation of armed forces taking over a European Union country helps highlight the likely peril. Such scenarios (multiple departures from the euro, the collapse of the currency) used to be considered outlandish. The fact they’re now being seriously pondered means a whole array of related consequences once also viewed as unthinkable are on the planning boards. In other words, if things get much worse for Europe, they risk getting really bad, very rapidly.
The Times piece doesn’t get carried away in nightmare mode, however. Instead it sounds out experts more generally on how things could go wrong. For example, the article cites and links a study done by a French economist who has examined cases of past and potential monetary failures, providing a full and sobering picture of how the wheels may come off euro zone economies (if they come off). Those findings are in English, and very much worth consulting. An even wider (but far briefer) over-view of the main economic impacts in Europe if the euro were to fail have been put together by Agence France Presse using a variety of sources in this piece. It’s not the kind of cheer one usually equates with year-end activities, but well-informed contingency thinking.
For Global Spin readers who can deal with French, another interesting report comes from Paris think-tank Institut Montaigne. In it, the institute’s experts explore the impacts of France being stripped of the euro. To get to that scenario, however, the study takes an entirely different angle: analyzing the presidential campaign pledge of extreme-right leader Marine Le Pen to pull France out of the single currency in favor of the franc. Those contrasting routes lead to the same dismal euro-less destination: a French economy in which as much as 19% of GNP would be destroyed in the space of a decade; and job losses would immediately mount into the hundreds of thousands, before creeping over the million mark towards the end of the first post-euro year. Ironically, the demise (or in this case, spurning) of the euro would in no way resolve the key factor underlying the crisis, the institute’s experts say: France’s current debt of around 85%, the predict, would shoot to 118% under the effects of currency devaluation, were the euro to be scrapped and the franc re-introduced.
That’s all pretty bleak—though some observers insist there may be a silver lining in the current black cloud of crisis. French researcher Emmanuel Todd argues that though the implosion of the euro would produce a period of economic pain, panic, and instability, he says that shock wouldn’t last as long as some predict (18, maybe 24 months), before companies and governments picked up and moved on. And because many euro countries would be starting anew after having brushed off huge amounts of debt through various degrees of default, Todd argues the post-euro economies could be re-constructed on more solid fiscal foundations.
Another consequence of such default, Todd says, would be freeing economies and governments from control of what he calls the “oligarchy” of mega-rich investors whose fortunes and interests drive and shape bond markets—and whose gain through safe government securities have influenced political leaders into building up huge public debt in the first place. Another benefit for European nations, Todd says, would be throwing off the domination of Germany, which he describes as dysfunctionally psycho-rigid, and so focused on its own national interests that it no longer cares about ruining its euro partners. Burning the rot from a teetering house, Todd suggests, will be hard and grim work, but at least leave enough of a sanitized structure to rebuild from.
That may sound to some like too extreme of a blame-and-punish-the-rich view to take seriously, yet Todd isn’t an observer anyone should write off. An unabashed leftist who switched his early opposition to the euro to more recent resignation that the useful and beneficial currency is probably doomed, Todd is no ideology-blinded seer of capitalistic disaster. His 1976 book, “The Final Fall”, used demographic and economic data to predict the collapse of the Soviet Union almost to the year, and he has since written studies across a variety of sociological disciplines to accurately forecast (and explain) major developments in Europe. It’s for that reason few people in France are willing to write off Todd’s warnings that recent socio-political events make very real the possibility that authoritarian forces may seek or take power in Italy, Greece, Portugal, Spain, and perhaps elsewhere in Europe, particularly if E.U. turmoil results in monetary and economic failure.
Unfortunately, a very interesting interview from last week with Todd on all those topics in the French weekly Le Point remains behind a pay wall. However, several other recent interviews with him like this one are available online (albeit most in French).