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That the EU, not just the single currency, is under threat will not surprise those who have read last week's Global Financial Stability Report (GFSR) from the International Monetary Fund (IMF), which has a dual role as the world's economic policeman and the leading intergovernmental economic-policy think tank. That report argues that fragmentation of the EU's financial markets... is now rampant. Coupled with the separate but related phenomenon of bank ‘deleveraging', it is threatening to blow apart Europe's post-Second World War integration project.
Why is this so? Firstly, because countering the fragmentation of the single financial market and market-driven deleveraging is something the ECB has been engaged in in its role as mission control for crisis containment over the past two years. But it cannot do on its own. Secondly, these twin threats, as the IMF points out, have spread again from the eurozone to central, eastern and south-eastern Europe. Worse, they are being driven in part by the officially sanctioned policies of national bank regulators and supervisors.
“We are now in a very, very dangerous phase of the crisis. The risk of increasing fragmentation is very high and this is something which the ECB alone cannot contain”, says Rym Ayadi, senior research fellow at the Centre for European Policy Studies in Brussels.
Assume that a euro break-up takes place. Will Europe return to that supposedly halcyon past when the common market was just a trading bloc of sovereign states or, even better, the euro-free, economic union of the single market? No. Break-up would trigger sudden, probably extreme, moves in the exchange rates. Anders Åslund, a senior fellow at the Peterson Institute for International Economics,... says that history's lesson is that currency union break-ups are accompanied by hyper-inflation.
Break-up would also be accompanied by angry recriminations and an outbreak of rampant protectionism. Cross-border lending in the EU27 would collapse further. It is impossible to imagine that peripheral and eastern European member and candidate states, suddenly faced with the withdrawal of financial support (what, incidentally, would replace the ECB and the European Stability Mechanism in this break-up scenario?) sitting down happily together with Germany, the Netherlands or the United Kingdom, either to keep their markets open or to implement common trade or competition policies.
Those who believe the collapse of the euro would usher in a simpler, more profitable world should be careful what they wish for.
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