OECD: euro collapse would have 'highly devastating outcomes' worldwide
The collapse of the euro could send the world's advanced economies into a severe recession, dragging emerging markets with them into the mire, the Organisation for Economic Co-operation and Development warned on Monday.
In his introduction to the report he said: "Recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption if not addressed."
In a devastating critique of eurozone leaders' hesitancy and dilatoriness, he said: "The scenario so far is that Europe's leaders have been behind the curve. We believe this could be very serious."
His comments came amidst evidence that the 17 eurozone countries are even wider apart on the measures required to staunch the exit of global investors and prevent a credit crunch on an even worse scale than in 2008-09.
Padoan also made plain that the OECD's depressed economic forecasts could be downgraded even further if one or more countries default on their sovereign debt and EU leaders fail to agree on solutions to the crisis at their summit on December 8-9.
Padoan said political leaders needed to ensure "smooth financing at reasonable interest rates for sovereigns" in order to block contagion. "This calls for rapid, credible and substantial increases in the capacity of the EFSF together with, or including, greater use of the ECB balance sheet.
"Such forceful policy action, complemented by appropriate governance reform to offset moral hazard, could result in a significant boost to growth in the euro area and the global economy."
In other words, brace for big changes in store for the EU.
Beware of falling masonry
Now an even bigger calamity is looking likelier. The intensifying financial pressure raises the chances of a disorderly default by a government, a run of retail deposits on banks short of cash, or a revolt against austerity that would mark the start of the break-up of the euro zone.
The prospect that one country might break its ties to the euro, voluntarily or not, would cause widespread bank runs in other weak economies. Depositors would rush to get their savings out of the country to pre-empt a forced conversion to a new, weaker currency. Governments would have to impose limits on bank withdrawals or close banks temporarily. Capital controls and even travel restrictions would be needed to stanch the bleeding of money from the economy. Such restrictions would slow the circulation of money around the economy, deepening the recession.
After a long article, we finally get to the key information:
But any lasting stability for the euro must lie with governments, particularly in the degree to which they are willing to give up fiscal sovereignty in return for pooling liabilities.
Germany stands firmly at one extreme of this debate. Its chancellor, Angela Merkel, wants big changes to force probity (and wants the EU summit on December 9th to focus on such rule changes),
Another new proposal is intriguing—thanks, in part, to its provenance. Germany’s Council of Economic Experts recently proposed a “European Redemption Pact”. This scheme would place the debt, in excess of 60% of GDP, of all euro-zone governments not already in IMF rescue plans into a jointly guaranteed fund that would be paid off over 25 years.
At its peak, the redemption pact would be huge: the joint liability would amount to €2.3 trillion. But it would technically be temporary. For all these safeguards, Germany’s government has so far poured cold water on the idea. But time is running out. And the scale of the impending catastrophe demands radical answers.
Eurozone Exits 'May Spark Global Depression'
The Organisation for Economic Cooperation and Development has warned that an exit out of the eurozone by some countries could cause "wealth destruction" and a global "deep depression".
OECD chief economist Pier Carlo Padoan warned rather cryptically that the international organisation’s latest economic forecasts did not take into account the possibility of a "large negative event".
"If everything came to a head, with governments and banking systems under extreme pressure in some or all of the vulnerable countries, the political fall-out would be dramatic and pressures for euro area exit could be intense.
"The establishment and likely large exchange rate changes of the new national currencies could imply large losses for debt and asset holders, including banks that could become insolvent.
"Such turbulence in Europe, with the massive wealth destruction, bankruptcies and a collapse in confidence in European integration and cooperation, would most likely result in a deep depression in both the exiting and remaining euro area countries as well as in the world economy.
As far as I know, this is the first time a major public sector organisation has mapped out the possible consequences of a euro break-up (though a couple of investment bank economists have had a go).
A Continent Stares Into The Abyss
In the middle of its biggest crisis, Europe is hopelessly divided. One summit follows the next, and they all end with conciliatory statements and avowals, but not with any shared plan for how to save the euro.
The situation could hardly be any more dramatic. The European monetary union threatens to implode unless something happens soon.
The moment of truth is approaching, now that the end game for the euro has begun. But what will happen now? In the coming weeks, but particularly in the first quarter of 2012, the ailing European countries will have to raise massive amounts of money.
The previous bailout attempts have been worthless, they say, noting that Europe must finally reach for the only weapon whose firepower is endless, the European Central Bank. The ECB must finance the debtor nations, even if its own constitution bars it from doing so. The central bank has enough money, and it can also print money if necessary.
Most European leaders share this realization by now -- all except Merkel. She remains resistant, concerned about the central bank's independence and monetary stability. She is also staunchly opposed to all attempts to pool the debts of euro nations through jointly issued debt known as euro bonds.
Merkel is also concerned that the debt-stricken nations would immediately revert to their old bad habits if they felt that their rescue was certain. For this reason, the Germans only want to approve aid in return for strict conditions.
Now we get to the "big crisis = big change" part:
The instruments and programs with which Merkel and her counterparts have sought to control the crisis have proved to be too timid.
The meager successes of the euro rescuers to date have fueled calls for the use of what is perceived as a stronger weapon: the ECB's so-called "big bazooka." Until now, the Germans, in particular, have refused to deploy the central bank's ultimate instrument of deterrent, but the pressure is mounting.
However, this scenario presents a big conflict with the EU's treaties:
The ECB's interventions are still somewhat justifiable, because they are limited in scope and in time. However, if the central bank were to open all the floodgates, as some are demanding, its actions would hardly be compatible with the European treaties.
They expressly prohibit the ECB from financing the countries of the euro zone with the money presses. The Treaty on the Functioning of the European Union states that the central bank may not "purchase (debt instruments) directly."
There are many who see this further breach of the European treaties as the lesser evil. They argue that Europe is in an extraordinary state of emergency, because if nothing is done the monetary union will collapse, plunging Europe into crisis.
The Germans also want an amendment to the EU treaties -- not to introduce euro bonds, but to make them unnecessary.
Berlin proposes amending the Lisbon Treaty in such a way that budget offenders could be stopped in time. This is intended to harmonize budgetary policies in the euro countries over time.
European Council President Van Rompuy is expected to submit proposals by the next Council summit on Dec. 9. However, ideas about these proposals diverge widely between Berlin and other capitals.
There is growing skepticism in the financial markets over whether the euro can even be saved in the end. Last week, Britain's Financial Services Authority already called upon British banks to prepare themselves for the end of the monetary union.
The bottom line?
Something big must happen in the EU, and it must happen relatively soon.