Analysis: Euro zone failure could be vast geopolitical shock

LONDON Thu Nov 10, 2011 9:54am EST

German Chancellor Angela Merkel addresses a news conference with Romanian President Traian Basescu in the Chancellery in Berlin, November 10, 2011.    REUTERS/Fabrizio Bensch

German Chancellor Angela Merkel addresses a news conference with Romanian President Traian Basescu in the Chancellery in Berlin, November 10, 2011.

Credit: Reuters/Fabrizio Bensch

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LONDON (Reuters) - Any euro zone failure would send shock waves around the globe, shifting the balance of geopolitical power and perhaps prompting a fundamental reassessment of what the world's future might look like.

EU sources told Reuters that officials of France and Germany, since the 1950s the driving forces of European integration, had held discussions on a two-speed Europe with a smaller, more tightly integrated euro zone and a looser outer circle.

Estimates of how likely the currency bloc is to break up, how damaging it might be and what might remain afterwards vary wildly. But with European leaders still struggling to find a credible response to the crisis, the prospect of one or more countries leaving -- and effectively defaulting on their sovereign debt as they do so - is seen rising by the day.

Suddenly, pundits, policymakers and other observers find themselves questioning one of their most fundamental assumptions -- that an increasingly united Europe would be a key player in a newly multipolar world.

"You already have one of the great pillars of globalization, the United States, entering a period of difficulty and looking inward," said Thomas Barnett, US-based chief strategist of political risk consultancy Wikistrat -- which is being asked by several private clients to urgently model scenarios. "Now one of the other pillars, Europe, looks about to implode."

That, he said, could leave the continent's powers -- who only a handful of years ago made up much of the G7 group of largest economies -- increasingly sidelined as China, India, Brazil and others rose.

At the very least, analysts say, the world may have to get used to a Europe that has lost much of its confidence and has much less appetite for international engagement.

Coming after so many meetings not just of European leaders but also the G20, it would also leave the reputation of existing global governance systems and a generation of political and economic elites in tatters. Some of the damage may already be largely irreversible.

"Even if by some magic the crisis were to be over tomorrow, the other strategic actors in the world are already beginning to revise their views of Europe," said Thomas Kleine-Brokhoff, a strategy expert at Europe-facing Washington DC think tank the George Marshall Foundation of the United States. "Any consensus that Europe was simply and certainly on the path to integrate further and become a unitary actor is gone."

That raises interesting questions for other areas of the world, where many had often expected regional blocs would gradually in time form EU-like entities and move to closer integration.

"Europe was supposed to be the model for others to follow," said Nikolas Gvosdev, professor of national security studies at the US Naval War College. "That's going to be questioned."

DECLINE OF THE WEST?

For some, any unraveling of the euro zone -- whether or not it brings with it a collapse of the wider EU -- would be seen as yet another sign of much faster than expected western decline.

"For India, China and many of the other new powers, they don't see simply a crisis of the euro zone," said Kleine-Brokhoff at the George Marshall Foundation of the United States. "They see a crisis of the rich world and it makes them even more confident that their time has come."

But that interpretation, some analysts say, could prove an illusion.

"No one would be laughing -- I don't think there would be any winners at all," said Michael Denison, a former senior adviser to ex-British Foreign Secretary David Miliband and now research director for consultancy Control Risks. "You'd have a banking and sovereign debt crisis that would hurt everyone."

Whilst relatively self-sufficient states such as India might be amongst the least affected, most analysts say other emerging markets could suffer perhaps disproportionately.

Whilst the United States and possibly a handful of other states such as Switzerland might enjoy safe haven status and incoming capital, US-based private intelligence consultancy Stratfor -- which puts the prospect of at least a partial euro zone breakup within the year as high as 90 percent -- believes China could prove the greatest loser.

"You're going to see ... a collapse in capital flows to countries like Vietnam, Brazil, parts of Africa," said Peter Zeihan, Stratfor vice president for strategy. "It's also going to be the end of the Chinese economic miracle. The largest single market for China is Europe. That's going to have a huge knock-on effect in China which could include social revolution."

NOT QUITE YUGOSLAVIA?

Taken as a sign of what increasingly looks like a rudderless and fragmented world, some states may take matters more into their own hands -- as Israel is already suspected to be considering over Iran -- rather than multilaterally.

"It is almost certainly going to make European participation in operations such as Libya much less likely," said Gvosdev at the US Naval War College. "That comes just as Washington was hoping Europe would be able to take more of the strain."

Wikistrat chief strategist Barnett says much depends on what emerges if the Euro falls. If, as many suspect, a rump euro zone around Germany remains whilst Mediterranean states go their own way, the whole geopolitical focus of the continent could shift.

The northern element, he suggests, could focus its attention more to the east, giving priority to what could either become a corporatist or confrontational relationship with Moscow. The southern states, in contrast, might integrate much more closely with North Africa and the rest of the Mediterranean -- a region perhaps dominated by a newly assertive Turkey.

The euro itself should still be salvageable, he says, but it may just be that the political will is simply not there.

"It's essentially a common-law marriage that never quite made it to the church and now seems to be moving toward a split," said Barnett. "It shouldn't be necessary, you would have hoped that it could be avoided, but we are living through an age of political immaturity."

There is a high likelihood of a rise in street protest and resistance to austerity measures in Europe and probably also elsewhere, many experts say, even if more serious violence should largely be avoided.

"This isn't the breakup of Yugoslavia," said Control Risks' Denison. But others aren't so sure. Chancellor Angela Merkel warned several weeks ago any euro zone failure might endanger the decades of peace the currency and the EU were supposed to cement.

Some worry the risks have been exacerbated by the extent to which Europe's political and wider elites refused until the last to consider the euro project might fail.

"It's very difficult to say any of this without sounding like rather a scaremonger, or someone addicted to worst case analysis," said Paul Cornish, professor of international politics at the University of Bath.

"We (may) be persistently resistant to the signs of change because we don't like what we see. euro zone failure might create deep political instability, possibly involving tension and even conflict. We will find ourselves under-equipped and ill-prepared to deal with whatever does happen."

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