Apocalypse now? - The nightmare scenario for the eurozone

What happens if the eurozone debt crisis remains unsolved? You don't want to know, says Vince Cable. Still curious? Ben Chu imagines the nightmare scenario

It is late 2012. Somewhere in the troubled eurozone periphery, perhaps Greece or Italy, a technocratic government collapses after imposing unprecedented levels of austerity for 12 months.

Parliament is dissolved and fresh elections are called. In the tumultuous election campaign, a new party, led by a charismatic unemployed taxi driver with no political experience, emerges as an unlikely front-runner. And against all expectations, this new force routs the discredited established parties and takes power.

The taxi driver's party promised to do things differently in the campaign. And in office, it is as good as its word. The new prime minister refuses to work with his eurozone partners, whom he blames for enforcing the austerity that has led to a doubling of unemployment over the past year. And against the advice of civil servants, he takes a unilateral decision to repudiate all the country's sovereign debts, quit the eurozone and restore the old pre-euro currency.

Though this bold move is initially cheered by a weary population, it turns out to be a short cut to ruin. Some businesses in the country experience a brief boom as the new national currency falls 90 per cent in value against the euro, making national exports instantly more competitive. But the beneficial effects of this devaluation are soon swamped by financial chaos. People discover that the savings in their domestic bank accounts, which have been converted into the restored national currency, have also effectively plummeted in value, wiping out much of their remaining wealth at a stroke. Individuals and companies also have debts that they owe to European banks which are still denominated in euros. After devaluation, the interest repayments soon become unsustainable. The result is a cascade of defaults.

The government is in financial trouble, too. Still spending more than it collects in taxes, the administration orders the central bank to print as much money as it needs to pay public-sector wages. Before long, inflation is running at 20 per cent and people's savings are soon wiped out utterly. People lose faith in the value of the national currency and a barter economy develops. Austerity has been replaced by anarchy. Finally, the government of the taxi driver falls after failing to reduce unemployment, and the International Monetary Fund steps in to run the country.

Meanwhile, a wave of contagion hits the rest of the eurozone. Several banks across the continent, which hold the debt of the nation that repudiated its debts, implode. Despite passing numerous official stress tests, they turn out to possess insufficient capital to absorb the losses arising from a eurozone sovereign default. Governments hurriedly nationalise those banks to prevent ordinary depositors' savings being wiped out. But the debt-servicing costs of other weak eurozone governments continue to shoot up as burned investors panic about the likelihood of further sovereign eurozone defaults.

The newly appointed German president of the European Central Bank, Jürgen Stark, refuses to buy sovereign bonds to support distressed governments, insisting that to do so would be to unleash a tidal wave of inflation across the continent. Eventually, the strain becomes too much. Other weaker states default on their debts and crash out of the eurozone. This results in more bank failures in stronger countries and more nationalisations. But these bank rescues ruin the public finances of France, which was long ago downgraded by the credit rating agencies. With this crucial pillar of the eurozone damaged, the entire single currency breaks apart and national currencies are reintroduced.

Capital floods into Germany, looking for a safe home. This drives up the value of the newly reinstalled Deutsche Mark. But this hammers the German export sector. And with the rest of Germany's European customers also slipping into chaos, its exports fall off a cliff in the following months, throwing hundreds of thousands of Germans out of work. The great engine at the centre of the European economy stalls.

Turmoil in the eurozone sends shockwaves through the rest of the global economy. With its major European trading partners collapsing, Britain is plunged back into recession. British banks have to be nationalised as hundreds of billions of euros of lending to eurozone governments and companies goes bad. Domestic unemployment rises above four million.

Banks in America also turn out to be severely exposed to eurozone sovereign debt and have to be rescued by the administration of the newly re-elected President Barack Obama. But the cost of this rescue pushes up US national debt well above 100 per cent of GDP. And even though capital is flowing freely into US government bonds, which are still seen as the world's safest asset, the Republicans in Congress say they will refuse to vote for another rise in the national debt ceiling. Government should be shrinking, not expanding, they argue.

With the prospect of a default from the US government looming, investors start dumping dollars, the world's global reserve currency, sending the international money markets into a new meltdown. Global trade levels plummet. The export-driven economies of China, Brazil and Russia crash into recession. Spending on investment comes to a standstill across the world. The IMF finds multiple nations making claims on its resources all at once. But it does not have enough credit to go around.

World leaders convene a series of emergency meetings. But they are unable to agree on co-ordinated fiscal stimulus measures. A crisis caused by excessive debt cannot be solved by more debt, say Britain and Germany. And the major central banks are still refusing to provide monetary stimulus, pointing to runaway inflation in those nations that left the single currency. Global unemployment rises. Vast makeshift camps of the desperate and destitute are established in the world's capitals. Democracy itself comes under strain in some parts of the advanced world. Anti-immigrant movements seize power in smaller states, preying on people's fear and confusion. Larger nations impose trade barriers to protect their industries from international competition. Global trade networks slowly break down, nations turn in upon themselves and the world enters a slump even more severe than the Great Depression of the 1930s.

Start your day with The Independent, sign up for daily news emails
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: 3rd Line Virtualisation, Windows & Server Engineer

£40000 - £47000 per annum: Recruitment Genius: A 3rd Line Virtualisation / Sto...

Recruitment Genius: Refrigeration and Air Conditioning Service Engineer

£26000 - £35000 per annum: Recruitment Genius: A successful national service f...

Recruitment Genius: Business Development Executive / Sales - OTE £25,000

£15000 - £25000 per annum: Recruitment Genius: This is an opportunity to join ...

Recruitment Genius: Sales Administrator - Fixed Term Contract

£17500 - £20000 per annum: Recruitment Genius: We currently require an experie...

Day In a Page

Syria civil war: Meet the military commander who says his soldiers will not rest until every inch of their war torn country is free of Islamist 'terrorists'

‘We won’t stop until Syria is back to normal’

Near the front lines with Islamist-controlled towns where Assad’s troops were besieged just last month, Robert Fisk meets a commander confidently preparing his soldiers for battle
The inside story of how Bill Clinton built a $2bn global foundation may undermine Hillary's chances

The inside story of how Bill Clinton built a $2bn global foundation...

... and how it may undermine Hillary's chances in 2016
12 best olive oils

Extra-virgin, cold-press, early-harvest, ultra-premium: 12 best olive oils

Choosing an olive oil is a surprising minefield. Save yourself the hassle with our handy guide
Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back