Euro Crash
Edited by Andy Ross
Investment experts at Deutsche Bank now feel that a collapse of the common
currency is a "very likely" scenario.
Two decades of progress in
Europe would be lost. Millions of business contracts and relationships would
have to be reassessed and thousands of companies would need protection from
bankruptcy. Europe would plunge into a deep recession. Governments would
have to borrow more billions to meet their needs and either raise taxes or
accept higher inflation.
The fronts between governments are
hardening. Italy and Spain want Germany to issue stronger guarantees for
their debts. They want the money without conditions. But the German
government will not accept this.
German companies are now assessing
the consequences of a crash. German exports to Italy and Spain alone are
valued at about €100 billion a year. Although sales of manufactured goods
would not end with a euro collapse, they would fall sharply. As soon as lira
or pesetas were reintroduced, the currencies would be devalued against the
euro by up to 40%. German goods would automatically become more expensive
and would soon be uncompetitive.
A collapse of the euro would end the
single market. Regionalism could return to Europe, and countries could
reintroduce customs barriers to protect domestic industry. Uniform
environmental rules would be replaced by a jungle of national regulations.
All of this would plunge the German export economy into a crisis.
In
2010, German companies sold goods worth about €218 billion in Italy, Spain,
Portugal, Greece, Ireland, and Cyprus, with Italian subsidiaries alone
accounting for €96 billion. The value of foreign direct investment in these
countries is about €90 billion. A euro crash would reduce labor costs in
Portuguese or Spanish factories, but on balance it would be a bust.
A
crash would devastate the financial sector too. If Club Med countries left
the eurozone, customers would draw down their accounts in those countries.
And because financial companies in these countries are closely intertwined
with the rest of the eurozone, customers would also raid their German banks.
The withdrawal of several countries from the eurozone would shake the
European banking system to its foundations.
If Ireland, Portugal,
Spain, and Italy joined Greece in leaving the euro, 29 large European banks
would see a total capital shortfall of about €410 billion. Italy and Spain
account for a tenth of the European private and corporate banking business
at Deutsche Bank. The bank estimates its credit risks in these countries at
about €18 billion in Italy and €12 billion in Spain.
Companies are
doing what they can today to brace for the crash. They are financing deals
in the peripheral countries locally to avoid currency risk. Companies are
receiving loans almost exclusively from banks in their own countries. Where
cross-border transactions are unavoidable, banks are engaging in hedge
transactions. IT systems are being prepared for a Europe with multiple
currencies. And whenever they can, banks are establishing liquidity reserves
or depositing money with the ECB.
The consequences of a crash would
spread across the European economy like a tidal wave. In the first two
years, the eurozone countries would lose 12% of their economic output. This
is a loss of more than €1 trillion. In Germany, the recovery would end and
banks and companies would start collapsing like dominoes.
The German
Finance Ministry predicts that in the first year following a euro collapse,
the German economy would shrink by up to 10% and the ranks of the unemployed
would swell to more than 5 million people. Government debt would rise
sharply as tax revenues declined and government spending increased. The
total cost to the German economy could amount to a quarter of Germany's
gross domestic product, or well over €500 billion.
Asset managers see
only two ways to protect themselves against a euro crash: to invest the
money in tangible assets or to get it out of Europe.
AR This is my nightmare.
