Why Any Euro Exit Would Cause 'Complete Chaos'

Published: Tuesday, 6 Sep 2011 | 4:21 AM ET Text Size

By: Cathe i!e B"yle Sta## $ ite , C%BC&'"(

The exit of any of the countries in the euro region from the single currency would cause "complete chaos" in that country and is "almost inconceivable", Erik Nielsen, global chief economist at UniCredit, told CN C Tuesday as the euro !one debt crisis continued to loom over European markets" This week looks set to be another week of gloom in the euro !one as the market looks for more decisive action on the debt crisis affecting peripheral economies" Greater fiscal union within the euro zone and issuing a euro bond are two options that have been mooted" There are increasing concerns that a double#dip recession could occur, with economists such as Nouriel $oubini warning that Europe and the US could be in an even worse place than during the last economic crisis "

The future of the euro

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itself has come under

scrutiny, with some arguing that struggling economies such as %reece may have to exit the currency" "Every contract in %reek law is in the euro" Every creditor would have a claim on a debtor whose income suddenly became in the drachma," Nielsen, formerly of %oldman &achs, said" "There would be defaults across the private sector and complete chaos"" 'e believes that a "back#door" exit from the euro is more likely, citing the example of the situation in California during ())*, when the state started issuing +,Us to its creditors, as a way a country could achieve that" The euro !one is facing the twin difficulties of hefty debt burdens and low growth" "The biggest issue facing policymakers in Europe right now is narrowing the gap between the way Europe has historically made progress and the speed at which the markets want

to see progress," &tephen %allo, head of market analysis, &chneider -oreign Exchange, told CN C" ".usterity is not the answer, it/s about structural reforms," %allo added" Worries About Italy ,n Tuesday, wor ers in Italy were set to stri e over austerity plans" There are concerns about the Italian government!s handling of the crisis " "+magine if erlusconi had full control over monetary policy in +taly, how much more of a mess we would be in," said %allo" 'e believes that the U& and U0 governments have been better at "saying and doing the right things" during the crisis" "The key thing is to go back to the period when they were negotiating 1aastricht," &imon 2errick, chief currency strategist, N3 1ellon, told CN C"

"Certain governments were inevitably going to fail to meet those targets" .nybody who watched +taly during the 4*5)s and 4**)s would have had a very strong clue that they were not going to meet those targets"" 2errick, who admitted to being overly bullish on the euro in .ugust, believes that the U& dollar and the &wiss franc are still worth investing in" "+t/s still too early to make brave calls," he added" "+ don/t think we have seen the worst of this particular crisis""

European mar ets opened slightly up

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Tuesday after 1onday/s sell#off" "1aking brave calls in markets that are in such huge turmoil is very challenging," .na .rmstrong of .rmstrong +nvestment 1anagement, told CN C" &he said that her company has made some money from European telecommunications and healthcare stocks recently"

"This is not so much a li6uidity and banking related crisis as a sovereign related crisis, and it/s still very difficult to tell what will happen in +taly and what the impact will be on the core countries," .rmstrong added" 2011 CNBC.com