If the eurozone fragments, Europe also fails, spelling economic catastrophe for the US and much of the world. Only by understanding the enormity of these risks can Europe's leaders overcome internal tensions and converge on a potentially game-changing response to the crisis.
Respectable voices within mainstream opinion are now concluding that the eurozone may no longer be sustainable. In this emergent view, it would be better for Europe to split up now instead of later when the costs would be much higher. But this view goes too far.
There should be no doubt: If the eurozone totally fragments, Europe also fails as the single market and the European Union may also collapse.
In the short run, fragmentation would be the economic and financial equivalent of a cardiac arrest for Europe. Cross-border flows of goods, services, and capital would be disrupted as currency denomination concerns overwhelm the normal valuation calculus. Large currency mismatches would fuel corporate financial stress and could even give rise to multiple defaults. Unemployment would surge. And the provision of basic financial services, from banking to insurance, would be curtailed, with a high probability of bank runs in the most vulnerable eurozone members.
Controls would proliferate – as the weak economies sought to limit the surge in capital outflows, and as the strong economies resisted excessive inflows. In the process, the very functioning of the common market that underpins the European integration project would be undermined. Balkanization of banks, financial markets, and public debt markets that is already ongoing would be followed by balkanization of trade in goods, services, labor, and capital, and a return to trade and financial protectionism.
Those countries that have been buffeted now by several years of crisis management have limited, if any, internal cushions to absorb new blows. As a result, the economic and financial disruptions would likely fuel social unrest and political dysfunction – further undermining national support for European integration.
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