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Sep 30, 2011 | 01:45 GMT

5 mins read

Europe's Best-Case Scenario

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.
The German parliament voted overwhelmingly today to improve the eurozone bailout mechanism, the European Financial Stability Facility (EFSF), quieting worries that the issue would prove divisive enough to risk bringing down the German government, and improving confidence in the eurozone as a whole. Fast-forwarding somewhat, the euro will have stabilized, but with highly destructive consequences. This second round of EFSF reforms is designed to make the terms of bailout loans more bearable for Europe's distressed states and to speed up the process of issuing the loans. The new and improved EFSF is by no means sufficient to quell the eurozone's mounting problems, but if there was to be any hope of resolving the ongoing eurozone crisis, these reforms had to be approved. There are still minor issues holding up the reforms' full ratification by all 17 eurozone states, ranging from collateral demands to the normal squabbles of national politics. But German ratification was the main concern, because nothing can be accomplished if Germany isn't willing to take the lead in saving the eurozone. Yet it will take more than German interest to move this forward. There are three major financial crises on Europe's horizon: the need to bail out Italy, a banking crisis and a Greek default. Any could erupt in short order, and all are intertwined. The reforms the Germans just approved may make the EFSF more flexible and legally capable of handling these challenges, but the reforms do not give it the bulk it needs. To deal with the crises of the not-so-distant future, the EFSF will need 2 trillion euros, nearly five times its current capacity. All the angst and distrust that Europe endured to get to this point will soon have to be repeated. STRATFOR anticipates that this renewed and expanded effort will not begin until November, and will occupy most of the first half of 2012. But let's look forward a bit. Let's assume that no one balks at the cost and that EFSF 3 is ratified and implemented without hitches. Let's assume that the three crises occur on a schedule favorable to Europe's ability to handle them. Let's assume finally that the bailout programs prove sufficient and that the financial calamity of the eurozone's collapse is avoided. What is the end result of the best-case scenario, and what sort of Europe emerges from that? Fast-forwarding somewhat, the euro will have stabilized, but with highly destructive consequences. The fallout from bailouts to Italy and to banks all but guarantees that Spain would need a bailout, so the Spaniards would join the Italians, Portuguese and Irish in receivership. It is possible — likely, actually — that Belgium would join them as well. That would put about 125 million Europeans and their governments under austerity and cut off from normal credit markets. It would be at least three years before any of them could regain normal credit. This will result in negligible growth in public, corporate and private consumptive sectors. Meanwhile, the bailout states are already highly sequestered within the EU, and the banks do not wish to deal with them. Greece risks descending in an ugly downward spiral. All of these states would be a huge burden on the European system, and dealing with their sovereign debts would not be the only problem. A substantial portion of the European banking system would also be under receivership, greatly constricting credit flows to even healthy non-bailout states. It could well take the United Kingdom ten years to grow to its economic standing prior to the crisis, and it requires boundless optimism to see Continental Europe recovering any more quickly. In a Europe with minimal growth prospects and damaged banks, the few countries STRATFOR would expect to fare reasonably well are those that can generate their own capital. Nearly all of Europe's capital-rich locations are in northern Europe, the best being the Skagerrak, France's Beauce region, the Rhine, the northern reaches of the Danube and the Elbe. The last three of these are all in Germany. Therefore, the country with the best chance of muddling through post-"rescue" Europe is Germany. This will, however, not be a paradise for the Germans. Germany is an export-oriented economy and in this scenario much of Europe is unable to buy large volumes of German exports. Germany is at once Europe's largest source of capital, its largest economy and the chief contributor to the EFSF (as well as its arbiter and designer). Debate is already brewing in Europe over how much each country will pay in order to keep the eurozone alive. Already countries are starting to suspect that Berlin is rewiring the European system to its preferences. Once the financial storm has passed, European states may not like the world in which they find themselves living. And that is the best-case scenario.

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