Quantifying the Unthinkable (7 July 2010)
Amsterdam, 07 juli 2010
Suddenly the unthinkable is thinkable. The possibility that one or more of the members of European Monetary Union (EMU) might leave is no longer being dismissed, even by Eurozone politicians. In this report, we discuss not the probability of this – readers will doubtless have their own views – but rather its potential economic and financial market impact. Complete break-up would have effects that dwarf the post Lehman Brothers collapse.
EMU was designed to be irreversible. The sovereign debt crisis has set the markets thinking that this may no longer be so. German politicians are talking openly of EMU exit being an option. But given the political dimension of decisions to leave EMU, there is no definitive way of assessing their probability, although this does not stop commentators debating it endlessly.
Our purpose in this report is rather different; we assess not the probability of EMU break-up, but its impact. Calibrating the impact is especially challenging, given the unprecedentedscale and ambition of EMU. Indeed, it might be said that this is trying to “quantify the unquantifiable”. Nevertheless, faced with this risk, investors need to take a view.
We evaluate two boundary cases: a Greek exit and a complete break-up. Although there are many permutations in between, our results should give some indication of their potential impact as well.
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