Tags: UBS | Europe | Political | Fabric

UBS: Europe's ‘Political Fabric' at Risk

By Michael Kling   |   Wednesday, 28 Sep 2011 01:19 PM

Europe's debt crisis scenarios range bad to worse, UBS economists write in a note to clients.

If Greece leaves the eurozone, the ensuing economic stress could "result in severe social unrest and pressures on the political fabric of the EU itself," UBS experts write in their report, "Eurozone: Where Next."

Problems would include sharp jumps in risk premiums, large moves in exchange rates, high inflation in weak countries, and currency mismatches between assets and liabilities that prompt private sector defaults.

If it drops the euro, GDP across Europe would drop of 20 percent to 40 percent or more, causing "widespread bankruptcy and financial dislocation," they predict. "Yet that does not mean that exit can be ruled out."

A disorderly Greek default would probably cause the Greek financial system to collapse and quickly send financial shocks around the world, pushing countries into recession and threatening the fragile recovery in the United States.

The risk of a global recession has increased to 15 percent from nil just a few months ago.

Stocks could drop another 20 percent to 30 percent.

"We believe the eurozone sovereign crisis has entered a more dangerous phase," states the report from the UBS experts.

The economists urge Europe's leaders to do more to shore up investor confidence, including strengthening banks' capital buffers and forcing more austerity measures.

But don't count on that happening soon in Europe's political economy, they warn. "The likelihood is that the crisis will intensify before policy can deliver what is required."

The eurozone is dysfunctional, with systemic flaws, they say. Just focusing on austerity measures without addressing the imbalances between creditor and debtor nations won't work.

A major question is how much sovereignty Europeans will be willing to give up in return for financial integration.

The head of the European Commission, Jose Manuel Barroso, urged Europe to build a strong central government to fend off the crisis.

"If we do not move forward with more unification, we will suffer more fragmentation," he said Wednesday in a state of the union speech at the European Parliament in Strasbourg, France, according to the AP.

"I think this is going to be a baptism of fire for a whole generation," Barroso said.

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Europe's debt crisis scenarios range bad to worse, UBS economists write in a note to clients. If Greece leaves the eurozone, the ensuing economic stress could result in severe social unrest and pressures on the political fabric of the EU itself, UBS experts write in...
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2011-19-28
 

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