In today's global economy, what happens with the euro dollar has an effect on our economy too. A recent publication examined contrasting theories of what could happen in Europe. The main objective of the European Union agreement on fiscal and budgetary coordination is to ensure the survival of the euro, and more broadly bolster Europe's economic outlook.
It's become clear, however, that the goal has not been attained, and that the currency has won a short-term respite at best.
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.
The New York Times recently envisioned the scenario if Greece -the most weakened and vulnerable economy on the continent- were to make a return to the drachma: 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 and the wheels may come off euro zone economies (if they come off).
In another report, experts at Paris think-tank Institut Montaigne explored the impacts of France being stripped of the euro in favor of the franc and come 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%, they 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.
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.