Eurogeddon

EU countries are currently debating the purchase of Spanish bonds in order to calm down financial markets, the German newspaper Süddeutsche Zeitung reports. The money would be taken from the EFSF bailout fund. Spanish bonds are being pushed out of the market as yields on 2-year, 5-year, and 10-year bonds hit record highs.

At the same time, Germany locked in its record-low borrowing costs at an auction of ultra-long Bunds at Wednesday, the first auction since Moody’s Corporation (NYSE:MCO) lowered its ratings outlook on the country. It was the lowest yield ever paid at an auction in this maturity segment, proving that investors still view Germany as the place to seek refuge from the euro zone debt crisis.

Germany’s strategy to make bailout money dependent on austerity measures in the crisis-stricken countries is still being criticized, with some arguing that these attempts to limit Germany’s exposure will actually increase it, since they put the crisis countries under too much pressure to be able to serve their debt in the near future.

But while the cost of sustaining the European Monetary Union (EMU) is mounting, analysts agree that the impact of countries exiting, or of a complete euro zone break-up would be far costlier. An analysis by the ING Groep N.V (NYSE:ING) bank from 2011 came to the conclusion that if the EMU were to break up completely, the cumulative loss of output in the whole euro zone within the first two years would be over 12 percent, substantially bigger than the losses that followed Lehman Brothers’ demise back in September 2008. Euro zone GDP was estimated to fall by 9 percent.

The introduction of new post-euro currencies would see peripheral economies like Spain and Portugal suffer from inflation rates approaching double digits. At the same time, a deflationary shock would hit core countries like Germany. Having been of great utility for Germany with its strong export orientation, the end of the EMU would prove a great disadvantage for the country. A newly introduced Deutschmark would quickly appreciate against the euro, with some analysts regarding a rise by 40 to 50 percent to be realistic. Germany might have to write off its whole export industry as a result.

Against the background of this “Eurogeddon” doomsday scenario, the EMU exit has become what the ING study aptly describes as a “nuclear option”, which the core countries use to scare the crisis countries into accepting their austerity measures.