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Bring Out Your Dead - UBS Quantifies Costs Of Euro Break Up, Warns Of Collapse Of Banking System And Civil War

Tyler Durden's picture


Any time a major bank releases a report saying a given course of action is too costly, too prohibitive, too blonde, or simply too impossible, it is nearly guaranteed that that is precisely the course of action about to be undertaken. Which is why all non-euro skeptics are advised to shield their eyes and look away from the just released report by UBS (of surging 3 Month USD Libor rate fame) titled "Euro Break Up - The Consequences." UBS conveniently sets up the straw man as follows: "Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change." So far so good. Yet where it gets scary is when UBS quantifies the actual opportunity cost to one or more countries leaving the Euro. Notably Germany. "Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. " It also would mean the end of UBS, but we digress. Where it gets even more scary is when UBS, like many other banks to come, succumbs to the Mutual Assured Destruction trope made so popular by ole' Hank Paulson : "The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war." So you see: save the euro for the children, so we can avoid all out war (and UBS can continue to exist). The scariest thing, however, by far, is that for this report to have been issued, it means that Germany is now actively considering dumping the euro.

Executive summary:

Fiscal confederation, not break-up


Our base case with an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration. The risk case, of break-up, is considerably more costly and close to zero probability. Countries can not be expelled, but sovereign states could choose to secede. However, popular discussion of the break-up option considerably underestimates the consequences of such a move. 


The economic cost (part 1)


The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year. 


The economic cost (part 2)


Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over EUR1,000 per person, in a single hit. 


The political cost


The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.

A little more on that particularly troubling last point:

Do monetary unions break up without civil wars?


The break-up of a monetary union is a very rare event. Moreover the break-up of a monetary union with a fiat currency system (ie, paper currency) is extremely unusual. Fixed exchange rate schemes break up all the time. Monetary unions that relied on specie payments did fragment – the Latin Monetary Union of the 19th century fragmented several times – but should be thought of as more of a fixed exchange rate adjustment. Countries went on and off the gold or silver or bimetal standards, and in doing so made or broke ties with other countries’ currencies.


If we consider fiat currency monetary union fragmentation, it is fair to say that the economic circumstances that create a climate for a break-up and the economic consequences that follow from a break-up are very severe indeed. It takes enormous stress for a government to get to the point where it considers abandoning the lex monetae of a country. The disruption that would follow such a move is also going to be extreme. The costs are high – whether it is a strong or a weak country leaving – in purely monetary terms. When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences.


With this degree of social dislocation, the historical parallels are unappealing. Past instances of monetary union break-ups have tended to produce one of two results. Either there was a more authoritarian government response to contain or repress the social disorder (a scenario that tended to require a change from democratic to authoritarian or military government), or alternatively, the social disorder worked with existing fault lines in society to divide the country, spilling over into civil war. These are not inevitable conclusions, but indicate that monetary union break-up is not something that can be treated as a casual issue of exchange rate policy.


Even with a paucity of case studies, what evidence we have does lend credence to the political cost argument. Clearly, not all parts of a fracturing monetary union necessarily collapse into chaos. The point is not that everyone suffers, but that some part of the former monetary union is highly likely to suffer.


The fracturing of the Czech and Slovak monetary union in 1993 led to an immediate sealing of the border, capital controls and limits on bank withdrawals. This was not so much secession as destruction and substitution (the Czechoslovak currency ceased to exist entirely). Although the Czech Republic that emerged from the crisis was considered to be a free country (using the Freedom House definition), with political rights improving relative to Czechoslovakia (also considered to be a free country), Slovakia saw a deterioration in the assessment of its political rights and civil liberties, and was designated “partially free” (again, using Freedom House criteria).


Similarly the break-up of the Soviet Union saw authoritarian regimes in the resulting states. Of course, this was not a change from the previous status quo, but that is not the point. The question is not how a liberal democracy develops, but whether a liberal democracy could withstand the social turmoil that surrounds a monetary union fracturing. We lack evidence to support the idea that it could.


Even the US monetary union break-up in 1932-33 was accompanied by something close to authoritarianism. Roosevelt’s inauguration was described by a contemporary journalist as being conducted in “a beleaguered capital in wartime”, with machine guns covering the Mall. State militia were called out to deal with the reactions of local populations, unhappy at what had happened to the monetary union (and specifically their access to their banks).


Older examples are less helpful, as they tend to be more akin to fixed exchange rate regimes under a gold standard or some other international monetary arrangement. Nevertheless, the Irish separation from the UK, or the convulsions of the Latin Monetary Union in Europe (particularly around the Franco-Prussian war in 1870 and its aftermath) saw monetary unions fragment with varying degrees of violence in some parts of the union.


Writing in 1997, the Harvard economist Martin Feldstein offered a view that seems to be somewhat chillingly precognitive. He said “Uniform monetary policy and inflexible exchange rates will create conflicts whenever cyclical conditions differ among the member countries... Although a sovereign country... could in principle withdraw from the EMU, the potential trade sanctions and other pressures on such a country are likely to make membership in the EMU irreversible unless there is widespread economic dislocation in Europe or, more generally, a collapse of the peaceful coexistence within Europe.” (emphasis added).

As for what happens if UBS, and the Euro Unionists lose the fight for the euro:

Our base case for the Euro is that the monetary union will hold together, with some kind of fiscal confederation (providing automatic stabilisers to economies, not transfers to governments). This is how the US monetary union was resurrected in the 1930s. It is how the UK monetary union, and indeed the German monetary union, have held together.


But what if the disaster scenario happens? How can investors invest if they believe in a break-up, however low the probability? The simple answer is that they cannot. Investing for a break-up scenario has not guaranteed winners within the Euro area. The growth consequences are awful in any break-up scenario. The risk of civil disorder questions the rule of law, and as such basic issues such as property rights. Even those countries that avoid internal strife and divisions will likely have to use administrative controls to avoid extreme positions in their markets.


The only way to hedge against a Euro break-up scenario is to own no Euro assets at all.

Alas, this will be the final outcome. Unfortunately trillions more in taxpayer capital will be lost before we get there.

In the meantime, enjoy as UBS just unwittingly announced the final countdown for the EUR.



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Tue, 09/06/2011 - 03:27 | 1637431 jomama
jomama's picture

because it's so difficult to predict what's coming.

Tue, 09/06/2011 - 02:38 | 1637385 Mediocritas
Mediocritas's picture

So here comes UBS chanting the "unity or bust" slogan along with the rest of the financial sector.

What a load of BULLSHIT

This is the fallacy of false choice. Backtracking partially or fully is a perfectly viable option and doesn't have to entail a catastrophic bust. Even if it does cost quite a bit, it's sure likely to end up costing a lot less than keeping on the current course and robbing the citizenry of Europe to bail out elite gamblers.

UBS sell this garbage for one reason and one reason only. Jumping ship destroys THEM. It's time for UBS to get taken out to the back paddock along with all the other economically cancerous banks. Afterall, their job is just information management and at the end of the day a company like Google could probably do the job of all of them combined, 10 times better and with 100 times fewer employees.

Tue, 09/06/2011 - 02:50 | 1637401 chump666
chump666's picture

On wires

Spanish Government saying Greece/Italy not fulfilling austerity plans.

Chaos...awaiting a fresh round of rating agency beatdown's of the PIIGS. 

Tue, 09/06/2011 - 04:25 | 1637485 Barefooted_Tramp
Barefooted_Tramp's picture

SNB puts SFR Exchange Rate to 1.20 minimum against EUR...


Tue, 09/06/2011 - 04:25 | 1637489 Peter Pan
Peter Pan's picture

If they leave the euro it will be a 6000 to 8000 euro cost in the first year. So what? If they stay they might lose everything in the long run. Scare tactics and nothing more to convince the judges to vote in a particular way. In the short run it may work, but in the long run some of these clowns will lose both their heads and the smiles on them.

Tue, 09/06/2011 - 04:32 | 1637497 Die Weiße Rose
Die Weiße Rose's picture

England is bankrupt (check Debt/GDP)

USA is bankrupt (check Debt/GDP)

last desperate moves of the increasingly desperate and crumbling british Empire....

Europe and the Euro is the future ;)



Tue, 09/06/2011 - 04:32 | 1637498 falak pema
falak pema's picture

the psy war has begun around the demise of this five legged animal called the EUro. 

Herr Merkel we await your call!

Tue, 09/06/2011 - 04:37 | 1637501 iNull
iNull's picture

God's wrath approacheth: (Third-person singular simple present indicative form of approach):

Tue, 09/06/2011 - 04:45 | 1637507 Die Weiße Rose
Die Weiße Rose's picture

God's wrath already happened 9/11

you can only push God's button for so long...

Tue, 09/06/2011 - 05:23 | 1637535 iNull
iNull's picture

Indeed. The wrath of war was here in the rocks and stones, a million years before any "man" set foot upon the terra.

Tue, 09/06/2011 - 04:47 | 1637511 Lord Welligton
Lord Welligton's picture

IMO it is more likely that trying to hold the EU Zone together by imposing an undemocratic fiscal union would cause social unrest  and, possibly, civil war.

Also fiscal union cannot happen in a democratic manner. It must be imposed by local government over-ruling the will of the people.

Tue, 09/06/2011 - 04:57 | 1637516 Hunch Trader
Hunch Trader's picture

Bernanke salivates at the thought of currently the only real global US dollar alternative disintegrating.

"Euro breakup" is nothing but The Fed - CIA black/psyop to guarantee US living for free by printing fiat and receiving real goods from world markets in return. They will stop at nothing trying to kill the Euro, including a Goldman Sachs debt hiding derivatives hit job to Greece to enable them to bankrupt the EU more (which already happened years ago).

Tue, 09/06/2011 - 06:03 | 1637579 anony
anony's picture

That's ok by me. 

Tue, 09/06/2011 - 12:55 | 1637803 chindit13
chindit13's picture

Obviously you'll be forwarding documentation to Julian Assange for release on Wikileaks.  I'll be looking forward to reading that.  I envy your access to information.

Tue, 09/06/2011 - 22:27 | 1640612 Religion Explained
Religion Explained's picture

Occam's razor baby!

Tue, 09/06/2011 - 05:00 | 1637520 iNull
iNull's picture

You will burn in hell, or something like that...I'm not up on my latin.

Tue, 09/06/2011 - 05:13 | 1637529 Manipulism
Manipulism's picture

Lamido Sanusi, Nigeria's Central Bank President has proclaimed the Chinese yuan to the global reserve currency. "The yuan is already traded in the streets of Nigeria, which shows that the market is ahead of us and we just follow suit," Sanusi said during a visit to Beijing

Tue, 09/06/2011 - 05:13 | 1637533 Lord Welligton
Lord Welligton's picture

Euro rises nearly 9% against the SWF on SWF Central Bank intervention.

For how long can they buy unlimited quantities of Euro.

Tue, 09/06/2011 - 06:32 | 1637603 Die Weiße Rose
Die Weiße Rose's picture

the smart money of the world, including Russia and China -realized a long time ago

that the Euro, the AUD and the Swiss Frank are much safer investments  than any US Dollar diluted Junk - failing as the so-called " world reserve currency " -  

I got all my money in AUD and Euro and I am smiling ;)

Tue, 09/06/2011 - 05:21 | 1637539 Irelevant
Irelevant's picture

Per The WSJ

Switzerland Caps Franc

Fixed exchange rate bitches!

This means we are going to have something big tomorrow from the German CC.

Tue, 09/06/2011 - 22:29 | 1640620 Religion Explained
Religion Explained's picture

OooOOOOOOooOOh!  Best post so far, +2500.

Tue, 09/06/2011 - 05:41 | 1637558 iNull
Tue, 09/06/2011 - 05:49 | 1637566 fenner
fenner's picture

It's not gonna happen. Too much political and financial costs will break down not only Europe, but also American and China. Or maybe 2012 finally comes.

Tue, 09/06/2011 - 05:56 | 1637572 working class dog
working class dog's picture

eliminate the ursury system bitches, one master is enough, government, the govt should charge the banks interest not the other way around. Govts should issue asset based money loans not debt based. This collapse started in 1913 and now critical mass. The German people are getting screwed just like the american people and getting screwed by the same beast, the ursury system. End it now.

Tue, 09/06/2011 - 06:00 | 1637577 anony
anony's picture

THE "Usury System".   What is a system?  Every minute of every day some Persons, People, Human Beans are the system. What must change is the Humans behind the system, for the system to change.

And by change, I don't mean substituting some other usurer.  And trying to get a hold of those anonymous scoundrels would be the equivalent of seeking after the Lost Dutchman gold mine. Or Atlantis. Or DB  Cooper.

Good luck with that.

Tue, 09/06/2011 - 06:00 | 1637576 DefiantSurf
DefiantSurf's picture

And the EU markets are up? WTF? Didn't they get the memo?


Tue, 09/06/2011 - 06:03 | 1637581 Manbarepig
Manbarepig's picture

But but but Krugman taught me that war is GDP positive, so we should break the Euro up immediately and sic everyone against each other!

Tue, 09/06/2011 - 06:26 | 1637598 dcb
dcb's picture

Gotta love this:

). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war."


Maybe that is because the "elites" have to be forced at the point of a gun to do so, while they destroy their iwn country for their own personal gain. as the theory I stated yesterday

teh elites of the status quo will spend unlimited amounts of other people money (taxpayer) to maintain the status quo.

Tue, 09/06/2011 - 06:32 | 1637601 jailnotbail
jailnotbail's picture

"We believe that some kind of fiscal union (or “fiscal confederation”, which has areassuringly Swiss sound to it) is going to be required to save the Euro."

How naturally that will lead to "some kind of fiscal union" as a device to save the US Dollar when our moment of doubt arises.  After all, it will have worked to save the Euro - and the world from the consequences of it's dissolution - so the efficiencies and synergies to be gained by combining the U.S., Canada, and Mexico into a North American Union will just seem a no brainer.

Tue, 09/06/2011 - 06:54 | 1637616 Die Weiße Rose
Die Weiße Rose's picture

A truckload of illegal Americans wearing Sombreros were caught sneaking into Mexico, looking for jobs.

Tue, 09/06/2011 - 07:09 | 1637620 Smithovsky
Smithovsky's picture

Tyler, where's the story on CHF's peg to the euro?  Gold took a 2.5% shit on that news in 7 minutes (but promptly recovered in the next half an hour).  

Tue, 09/06/2011 - 07:10 | 1637624 Sequitur
Sequitur's picture

Yeah, one of the Tylers, we need a post on this goddamn currency manipulation.

Tue, 09/06/2011 - 07:17 | 1637628 el-greco
el-greco's picture

War is nothing like as scary as totalitarianism.

Tue, 09/06/2011 - 07:23 | 1637631 Lets Hang Parliament
Lets Hang Parliament's picture

Well it would seem that UBS were on the "wrong" side of EUR/CHF and the SNB has bailed them out.

For how long is the question. Unlike previous SNB forays this one looks more sticky - well for the last three hours anyway!

Tue, 09/06/2011 - 07:51 | 1637657 Highrev
Highrev's picture



The risk case, of break-up, is considerably more costly and close to zero probability.

Just a small detail that the ZH "executive summary" left out.

Tue, 09/06/2011 - 07:59 | 1637669 gwar5
gwar5's picture

UBS, and the rest of the banks, are merely promoting Armageddon as the alternative to their shadow governments. Apparently we should accept world fascism and debt slavery as the preferrable alternative to their demise and the oh so 'scary' monetary future. I expect many more gasps of desperation.  


"Ooh Mr. Banker, puh-leeez don't throw me in that briar patch!" --Briar Rabbit 







Tue, 09/06/2011 - 08:09 | 1637689 Downtoolong
Downtoolong's picture

The scariest thing, however, by far, is that for this report to have been issued, it means that Germany is now actively considering dumping the euro

Scary to be sure. But, I would argue an even scarier thing is that 99.9% of the general population doesn’t even know about it or understand it. In fact, after walking around an outlet mall for two hours yesterday and watching thousands of zombies indulge in their favorite pastime of lapping up sunglasses, T-shirts, costume jewelry, makeup, tennis shoes, and every other kind of cheap imported crap under the sun, I’m pretty sure that the financial savvy of most Americans is still limited to figuring out how to spend more than their last dollar. Who needs Halloween?

Tue, 09/06/2011 - 08:27 | 1637758 greek 83
greek 83's picture

Germany won't leave Eurozone,a big part of its economy relies on exports to eurozone and a lower exchange rate of euro (lower than the one DM would have).Plus Eurozone gives Germany a far bigger weight on world scene.The markets and the power Germany gets by being a part of Eurozone by far outweigh any possible bailout (and no Germany won't have to pay the whoel debt of Europo,that's naive).Maybe the bailout will be accompanied by a more centralized Eurozone but that's fine for Germany.


In the end all the Pigs debts etc are the tip of the iceberg.The crisis that began 3 years ago,at first seemed like a financial crisis however it truly is a crisis of overproduction.People can't buy,despite all the debt,all the products made.For this reason and for others it's propably unprofitable to ivest on making real things.Maybe we have reached a point where no real increase can happen and the only thing that can happen is a redistribution of world production (see the rise of China) until an event happens that starts the whole game again (ww3 or something else)

Tue, 09/06/2011 - 22:39 | 1640647 Religion Explained
Religion Explained's picture

Debt saturation, baby. When you can barely service the existing debt, how are you gonna buy anything? It's not overproduction, it's the flaw in money-as-debt, which inexorably leads to evermore people getting interest from evermore debt, ending in everyone paying interest to everyone else and no money left to buy anything!

Tue, 09/06/2011 - 11:49 | 1638444 puck
puck's picture

I think the real matchup is

Dec 22, 2013 europe  america


russia  china

Tue, 09/06/2011 - 14:32 | 1638990 jhm
jhm's picture

several prophecy state the war will start in august and last three months.

russians in germany and northern, eastern and southern europe up to the rhine, chinese as well, from the southeast. the question is: do they come to conquer us or are they coming to help us. and if the latter, who then would be those against which we would need russian and chinese help. big war in the middle east going on the same time. rome burning, pope fleeing, paris as well. frankfurt nuked, prague destroyed. all that stuff.

i have a rather strange feeling here, when watching things unfold these days, nearly exactly as predicted ...

Tue, 09/06/2011 - 22:41 | 1640651 Religion Explained
Religion Explained's picture

I thought the prohecy said it was China vs everyone else.

Wed, 09/07/2011 - 01:36 | 1641031 pavman
pavman's picture

Man, what about Paraguay?!  No one ever prophesizes about Paraguay!  But I tell you, they will one day rule the world with an iron fist!  Hell, does this country even exist anymore?!

Tue, 09/06/2011 - 16:09 | 1639346 o-antonio-maria
o-antonio-maria's picture

I would not bet on this premature "civil war". There is only one war going on and this one envolves the dollar-pound masters, on one side, and the euro masters on the other side. Of course we know who's backing the euro (China, Russia, Saudi Arabia...) In any case, after the suiss move of today, I wonder what the BoE will do in a few weeks time... Will the Brits give the signal to an Israel attack on Iran?

Tue, 09/06/2011 - 20:22 | 1640206 Akrunner907
Akrunner907's picture

Who was the idiot that linked this story on the DrudgeReport?  Huh?  Don't you realize that you are going to wake the sheeple posting this crap on Drudge.  We need to keep this under wraps for a few more months. 

Tue, 09/06/2011 - 22:42 | 1640656 Religion Explained
Religion Explained's picture

Matt Drudge.

Tue, 09/06/2011 - 22:10 | 1640553 LaughingRebel
LaughingRebel's picture

Gold and Silver are cheap cheap cheap right now

Wed, 09/07/2011 - 01:31 | 1641014 pavman
pavman's picture

What I'm wondering is... can we short the Euro to zero?  Does that mean my investment goes to infinity?  :D  Now where'd I put that application for CitiFX?  Oh wait, contagion.  Doh.  Won't be worth much if Citi goes bankrupt and steals all my gains.  Dam, too bad this spot thing would kill market makers.

Tue, 12/27/2011 - 04:54 | 2012846 hamza123
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