The cost of holding the eurozone together could amount to as much as €2.4 trillion (£2 trillion) by 2015, according to analysis by Lombard Street Research (LSR).
Charles Dumas, the independent macroeconomic research consultancy’s chairman and the report’s primary author, also argues that it could be much less costly in the long run for countries to leave the currency bloc rather than fight to maintain the status quo.
The research suggests that it will cost at least €1.3 trillion for the eurozone to be held together. This optimistic scenario assumes that the debt of Greece and Portugal are written off and healthier economies such as Germany, France, Benelux, Austria and Finland fund the budget deficits of Spain and Italy.
But the group’s pessimistic scenario, which would cost €2.4 trillion, sees Spain and Italy also needing their bond maturities refinancing. This is expected to cost almost four times the amount of bailing out Greece and Portugal.
Dumas says: “The staggering trillion bill to preserve the euro only takes us to 2015. In reality, most of the debts will never be repaid and subsidies will need to continue, year in and year out. (article continues below)
“Indeed the euro can only survive if it becomes a fiscal transfer union with national sovereign debt subsumed in eurozone bonds.”
LSR’s study outlines four scenarios in which weaker or stronger members of the eurozone leave the currency bloc.
The departure of Greece and Portugal would see existing debt holders bear the brunt of most of the default, rather than the eurozone’s healthier members. Another scenario sees Spain and Italy also drop out of the bloc and take a bridging loan to manage their debts.
Alternatively, Germany and the Netherlands could leave the euro if it becomes clear that the bloc has failed to work. LSR says the sooner this occurs, the cheaper it would be. The Netherlands could also depart alone if Germany maintains its commitment to the project.
Dumas concludes: “The difficulties of the eurozone are dynamic and complex but we believe that our report, based on careful statistical analysis, points towards a growing likelihood that the eurozone cannot survive in its current form.”