The cost to Germany of leaving the euro could reach €8,000 for each adult and child in the country and spell disaster for the global economy, according to economists at UBS.
“Were a stronger country such as Germany to leave the Euro , the consequences would include corporate default, recapitalization of the banking system and collapse of international trade.” Stephane Deo, an economist at UBS, said in a research note on Tuesday.
“If Germany were to leave, we believe the cost to be around €6,000 to €8,000 for every German adult and child in the first year, and a range of €3,500 to €4,500 per person per year thereafter. That is the equivalent of 20 to 25 percent of GDP in the first year,” said Deo.
The cost of one of the weaker members of the euro leaving the single currency would be significantly less, according to Deo, but still lead to major problems for the world economyand global banking industry.
“Under the current structure and with the current membership, the Euro does not work," he said. "Either the current structure will have to change, or the current membership will have to change.”
As a result Deo expectsEurope to move slowly and painfully toward fiscal union.
“The risk case, of break-up, is considerably more costly and close to zero probability. Countries can not be expelled, but sovereign states could choose to secede. However, popular discussion of the break-up option considerably underestimates the consequences of such a move,” said Deo.
The economic consequences of a euro breakup are huge, but Deo believes the political costs could be even bigger.
“The economic cost is, in many ways, the least of the concerns investors should have about a break-up," he said. "Fragmentation of the Euro would incur political costs.”
“Europe’s 'soft power' influence internationally would cease", Deo said. "It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war."