Thinking the unthinkable on a euro break-up | Gavyn Davies | Insight into macroeconomics and the financial markets from the Financial Times – FT.com

Thinking the unthinkable on a euro break-up | Gavyn Davies | Insight into macroeconomics and the financial markets from the Financial Times – FT.com

It has suddenly become respectable to ask the question: what would happen if the euro broke up? Last week’s rise in German bond yields signals that a euro break-up is being taken more seriously by investors. I am told that London law firms are allocating large amounts of time to examining the validity, following a break-up, of cross-border contracts written in euros. And, to judge from my own inbox, asset managers are beginning to ask about the economics of how it could occur.
…
… if the euro were to disappear altogether, the extra complication of how to handle all the contracts denominated in euros would be a legal morass which would take many years to resolve, and in the meantime the financing of international trade could collapse for an unknown period of time. (The extraordinary legal complications are discussed here.)
Once investors start to look over this precipice in earnest, the resulting stampede out of all euro-denominated assets could become self-fulfilling. And any disorderly break-up of the euro would, at the very least, result in a period of deep European recession, before the eventual economic recovery could begin.
So serious are the risks that Germany and France are today reported to be contemplating urgent steps to save the euro by adopting earlier fiscal union, and by increasing financial support for peripheral bond markets (Route 3). About time, too.