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London (CNN) - Sir Mervyn King’s words today are chilling. The eurozone crisis is “extraordinarily serious and threatening” the Governor of the Bank of England said, and the UK’s central bank was drawing up contingency plans in case the zone breaks up.
This is the icing on the cake that has seen more and more politicians and commentators postulate the unthinkable: a breakup of the zone and the currency. The Economist starts this week’s lead article “even as the eurozone hurtles towards a crash.”
For some weeks now I have believed that such an event was nigh on impossible - surely, I reasoned, politicians would do what is necessary. The Economist says the “consequences are so catastrophic that no sensible policy maker could stand by and let it happen." With such ringing words I think it is worth distinguishing exactly what we are talking about.
I do not believe that the euro, as a currency, will disappear. Three hundred million people use it in their every day life. If the euro were to vanish, then we really are talking about turning the lights out and saying goodnight.
As for the eurozone, it’s a different matter. The eurozone probably won’t survive in its current form of 17 countries. The moment George Papandreou – when he was Greek prime minister – announced that his ill-fated referendum would be a “yes or no to the euro” a rubicon was crossed. The referendum didn’t happen but the incident left behind the concept that membership was no longer irrevocable – contrary to what the EU Treaty says. A country could say “we’re off.”
As the strains start pulling apart the economics of the project, something has to give - or the eurozone in its current form will collapse. This may involve one country leaving (or being kicked out) or a group of countries going off on their own. We can’t know yet.
If it is on the larger scale of failure, I promise you, it will be a catastrophe the like of which we haven’t seen. Banks will fail. Companies will go out of business. Jobs will be lost. People will be saddled with debts for generations. Civil unrest is entirely possible.
If it is just one or two countries being booted out, then the disruption will be much less for the rest, but pretty horrible for those countries involved.
Throughout all of this the euro, I have little doubt, will continue in a truncated form. Those using it will be left with an international weakling - ridiculed and ignored as a serious player. Europe will be the laughing stock of the world’s foreign exchanges.
The euro was a badly designed, poorly executed project whose problems were inherent at birth. The fact politicians failed to address them over many years is the reason why we have reached this nasty place.
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