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The Cost of 'Eurogeddon'

Monday, 25 Jun 2012 | 4:13 PM ET

The German Finance Ministry has estimated the cost of a euro zone breakup, and it's not pretty.

Just in case you were wondering how costly a breakup of the euro zone would be, the German Finance Ministry is here to help. Der Spiegel has published an internal ministry report that estimates a breakup would cause German unemployment to double, and GDP to contract by 10 percent.

On first glance, you might think that such an analysis would help move German voters toward the compromises needed to prevent a breakup, but Steven Englander, head of G10 currency strategy at Citigroup , says it's not that simple.

"The euro breakup scenario is not the same as a Grexit scenario," he wrote in a note to clients. In other words, if Greece alone were to leave the euro, the cost might be much smaller. And in any case, Englander says, Greece is hardly the only problem in the euro zone.

"As enthralling as the vampire vs. werewolf debate among adolescent girls is the FX market debate on whether Spain or Greece is more important in driving the euro risk," he wrote. Markets have been reacting more to Spain's troubles than to events in Greece, he says. "Finding a solution to Spain is a necessary condition for the euro zone holding together (rescuing Greece, but not Spain won’t accomplish much)."

As for what all this means for the euro, Englander is glum. "Neither the likely impasse between Greece and other euro zone countries on their respective visions of austerity, nor the costing of a euro zone breakup are euro positive," he wrote. "The euro’s weakness is that, while the willingness to find broad solutions has grown, the potential costs seem to be growing even faster" as the number of investment grade countries in the euro zone shrinks and weaker countries' troubles worsen.

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