By Bill Wilson — Markets have begun pricing in the likelihood of a European collapse, where key members of the eurozone withdraw from the monetary union, banking institutions collapse, and widespread defaults reshape the landscape across the pond.
This possibility, considered remote at best in recent months, is now considered to be at least a conceivable outcome from the ongoing sovereign debt crisis. Its increasing likelihood was embodied in UBS of Switzerland’s recent report, “Euro break-up – the consequences” which concludes that without fiscal union, the monetary union is doomed.
“Under the current structure and with the current membership, the Euro does not work,” writes UBS. “Either the current structure will have to change, or the current membership will have to change.”
Ironically, for its part, UBS views a breakup as “close to zero probability” in the paper, citing numerous legal and political hurdles. Instead, the bank sees “an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration.”
But considering its overall analysis — that without fiscal union the monetary union will fail — it is hard to envision a scenario under which the eurozone can be saved in the manner UBS considers.
The hurdles to fiscal integration appear to be even taller to clear than for any one member state to unilaterally pull out of the currency. For one, fiscal union — which would mean constituting a continental government with its own budget and its own debt issuances — would have to be unanimously adopted by every state in the EU.
After the catastrophe that the euro has wrought on the continent, does any observer see further integration as being a politically saleable proposition in parliaments across the continent? A recent poll by Bloomberg/YouGov found a full 59 percent of Germans were opposed to more bailouts, “even if they were necessary to keep the eurozone intact”.
Moreover, only 48 percent of Germans supported staying in the eurozone, with 44 percent opposed. That is a telling result. When push comes to shove, and fiscal union is put on the table, look for the number of Germans who want to get out of the eurozone to increase dramatically.
Especially when the ostensible purpose of the new union would be to start a more efficient means of propping up its most troubled members, what exactly is the incentive for stronger members to participate?
Perhaps that is why UBS’ most compelling case for integration comes in the way of threats: “If Germany were to leave, we believe the cost to 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. That is the equivalent of 20 percent to 25 percent of GDP in the first year.”
UBS finds that the biggest consequences would be “corporate default, recapitalisation of the banking system and collapse of international trade.”
The costs for weaker states like Greece leaving are even higher: “We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40 percent to 50 percent of GDP in the first year. “
States trapped under the boot of Brussels should ignore these warnings. Greece, Portugal, and other troubled sovereigns would be unquestionably better off if they were allowed to default and restructure their debts in new currencies. Yields on Greek bonds have reached highs of 88 percent.
How are these states better off remaining in this broken system?
In other words, the case for further integration makes little sense — unless you look at it through the eyes of UBS. As a lender to governments all over Europe of hundreds of billions of euros, it is one of the institutions with the most to lose should Greece, Ireland, Portugal, Italy, and others default and leave the eurozone.
Is the euro about to collapse? To get a straight answer, you may have to ask the peoples of Europe, not the banks.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.
