Earlier this month, UBS Investment Research released a report detailing the consequences of a "?Euro breakup" where one or more eurozone countries drop the common Euro. Although it may not have been obvious that the eurozone was even considering such a breakup in the first place, the report poses some interesting points. Since it appears to focus in parts on the consequence of a strong European country such as Germany dropping the Euro, some bloggers have speculated that the institute may have insider information that Germany is, in fact, considering such a move. The report does not confirm this but does state that a breakup would incur significant costs and is therefore not a probable scenario. Instead, UBS sees the Euro moving toward fiscal integration and finds that "?popular discussion of the breakup option considerably underestimates the consequences" of a breakup"”hence the report, which intends to set the record straight here. Some have suggested that a breakup would have a significantly negative impact on UBS and that this is the real motivation behind the focus of the report and its encouragement of moving toward fiscal integration as an alternative to breakup.
In a nutshell, the report states that the current structure and membership of the Euro is not viable and that one or the other will have to change to maintain the stability of the Euro and avoid disaster. The reason it offers involves the high economic cost of the Euro compared with its benefits for some of the member countries. The report details two risk scenarios for the economic costs of a breakup"”relating to a weak country (unnamed) and a strong country (Germany) dropping the Euro"”as well as the potential political costs. UBS is not alone in its criticism of the Euro's viability; in 2001, Romano Prodi, EU Commission president, acknowledged the limitations of the economic policy instruments in place at the time, suggesting that a future crisis was likely and that new instruments would inevitably be needed to fix it.
The report from UBS also points out that "?almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government or civil war." Strong words to be sure, but UBS does seem to be concerned that popular misconceptions may prevail to ultimately result in this monetary apocalypse.