by Don Alexander, MBA
Associate, RSD Solutions Inc.
In every economic crisis there comes a moment of clarity. In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone. The economic consequences of a failed system await them.
This is the thesis outlined by Peter Boone and Simon Johnson in their recent Baseline Scenario blog dated May 28th. It is also a classic failure of risk management and its failure to correct initial flaws in the creation of the euro.
Europe’s crisis to date is a series of “decisive” turning points that have been nothing but another step down a steep hill. Currently, Greece has faced five years of recession, over 20 percent unemployment, a series of broken promises from politicians and EU bureaucrats, resulting in political backlash. Greece’s economy can only get worse.
Some European politicians are now telling us that an orderly euro zone exit for Greece is feasible under current conditions, and Greece will be the only nation that leaves. They are wrong. Greece’s exit is simply another step in a chain of events that leads towards a chaotic dissolution of the euro zone
During the next stage of the crisis, Europe’s taxpayers will be rudely awakened to the large financial risks that have been foisted upon them in failed attempts to keep the single currency alive. The cost to taxpayers if Greece quits the euro could easily reach euro 300 billion. However, the ECB has taken the view that it has not taken any excessive risk.
A likely scenario is that the ECB realizes it has taken on a large amount of credit risk on its books. Investors start to flee peripheral banks and ECB funds fail to turn the tide. Capital flight could last for several months pushing a number of countries into a deep recession. German taxpayers will revolt at the additional exposure.
It is time for European and IMF officials, with support from the US and others, to work on how to dismantle the euro area. While no dissolution will be truly orderly, there are means to reduce the chaos. Many technical, legal, and financial market issues could be worked out in advance.
We need plans to deal with: the introduction of new currencies, multiple sovereign defaults, recapitalization of banks and insurance groups, and divvying up the assets and liabilities of the euro system. Some nations will soon need foreign reserves to backstop their new currencies. Most importantly, Europe needs to salvage its great achievements, including free trade and labor mobility across the continent, while extricating itself from this colossal error of a single currency.
This should be a good lesson for risk management of a flawed system design and the failure to make corrections. What is your euro exposure?
For more on this, follow the link: http://tinyurl.com/bsan8zc
