Variations: The variations are numerous based on which states leaves the eurozone and how they leave. This process could happen over years, or it could happen by 2013. One strange derivative of this partial breakup includes a two-tiered system for the eurozone, where the “strong” states are part of one group and the “weak” states are part of another. Maybe there would even be two separate currencies — kind of a minor euro and a major euro.
Benefits: The “strong” nations in the eurozone, such as Germany and France, reap all the benefits here. They no longer have to bankroll their weaker brethren, they would restore confidence in their banking system and their single currency would be strengthened now that the ne’er-do-wells are no longer allowed to trade euros. The weaker countries will suffer, to be sure, but at least the cancer is cut out and the EU will survive.
Risks: There is a risk that this will not be an orderly breakup; that weaker countries will drop out one by one as Greeks empty their bank accounts, or there’s an outright failure of national governments as voters rise up against bone-deep spending cuts. Worst-case scenario is a crippled eurozone of just France, Greece, Finland and Austria in a rather anemic “union.” And of course, let’s not forget that a partial breakup — especially one that happens slowly and painfully — will only make fear and uncertainty stronger. Such an event would prove not only that the old eurozone is dead, but there is no “new” order with which to forge ahead.
Scenario 3: The Eurozone Unravels Completely
General Result: All parties stop banging their heads up against the collective wall and decide there is no solution comprehensive enough or palatable enough to save the eurozone. Thus, the joint currency that first began circulating in 2002 dies after only a decade of use. Aside from political treaties that are available to all nations, the countries of Europe are on their own once more.
Some Items at Play: The biggest factor here is how self-aware the nations of Europe are if and when insurmountable obstacles present themselves. If the voters of EU member states cannot be convinced or recalcitrant politicians hold up the works, then the eurozone nations need to figure out in a hurry whether it makes sense to keep fighting to maintain the eurozone.
Variations: In short, if an all-out “divorce” happens, the only options are a voluntary breakup that happens in a reasonably quick and orderly fashion, or a meltdown that is a slow and chaotic ordeal.
Benefits: It’s hard to imagine that the breakup of the eurozone would be “good.” But if the move is orderly, at least the pain would be short-lived as member states all reissue their own currencies and we quickly see a divergence between stronger and weaker states. And, of course, the uncertainty would end. Yes, investors’ worst fears were realized — but hey, at least there’s no more wondering about the death of the euro anymore. We can all get on with our lives.
Risks: The risks to the weak EU states are clear, since leaving Greece or Spain to fend for themselves means essentially throwing them to the wolves. But there also are risks to stronger states like Germany. A few months ago, some economists estimated Germany would see its exports collapse by as much as 25% if it were no longer part of the currency union and benefiting from its trade ties. And then, of course, there’s the Armageddon scenario of a chaotic breakup to the euro where there are runs on banks and utter confusion over how to denominate debts. German banks would see huge writedowns to obligations in other nations and lending could freeze up. Not a pretty picture.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP.