Why Any Euro Exit Would Cause 'Complete Chaos'

The exit of any of the countries in the euro region from the single currency would cause "complete chaos" in that country and is "almost inconceivable", Erik Nielsen, global chief economist at UniCredit, told CNBC Tuesday as the euro zone debt crisis continued to loom over European markets.


This week looks set to be another week of gloom in the euro zone as the market looks for more decisive action on the debt crisis affecting peripheral economies.

Greater fiscal union within the euro zone and issuing a euro bond are two options that have been mooted.

There are increasing concerns that a double-dip recession could occur, with economists such as Nouriel Roubini warning that Europe and the US could be in an even worse place than during the last economic crisis.

The future of the euro itself has come under scrutiny, with some arguing that struggling economies such as Greece may have to exit the currency.

"Every contract in Greek law is in the euro. Every creditor would have a claim on a debtor whose income suddenly became in the drachma," Nielsen, formerly of Goldman Sachs, said. "There would be defaults across the private sector and complete chaos."

He believes that a "back-door" exit from the euro is more likely, citing the example of the situation in California during 2009, when the state started issuing IOUs to its creditors, as a way a country could achieve that.

The euro zone is facing the twin difficulties of hefty debt burdens and low growth.

"The biggest issue facing policymakers in Europe right now is narrowing the gap between the way Europe has historically made progress and the speed at which the markets want to see progress," Stephen Gallo, head of market analysis, Schneider Foreign Exchange, told CNBC.

"Austerity is not the answer, it's about structural reforms," Gallo added.

Worries About Italy

On Tuesday, workers in Italy were set to strike over austerity plans. There are concerns about the Italian government's handling of the crisis.

"Imagine if Berlusconi had full control over monetary policy in Italy, how much more of a mess we would be in," said Gallo.

He believes that the US and UK governments have been better at "saying and doing the right things" during the crisis.

"The key thing is to go back to the period when they were negotiating Maastricht," Simon Derrick, chief currency strategist, BNY Mellon, told CNBC.

"Certain governments were inevitably going to fail to meet those targets. Anybody who watched Italy during the 1980s and 1990s would have had a very strong clue that they were not going to meet those targets."

Derrick, who admitted to being overly bullish on the euro in August, believes that the US dollar and the Swiss franc are still worth investing in.

"It's still too early to make brave calls," he added. "I don't think we have seen the worst of this particular crisis."

European markets opened slightly up on Tuesday after Monday's sell-off.

"Making brave calls in markets that are in such huge turmoil is very challenging," Ana Armstrong of Armstrong Investment Management, told CNBC. She said that her company has made some money from European telecommunications and healthcare stocks recently.

"This is not so much a liquidity and banking related crisis as a sovereign related crisis, and it's still very difficult to tell what will happen in Italy and what the impact will be on the core countries," Armstrong added.