Europe confronts a complex set of political and economic challenges. Recent weakness in asset markets in Asia shows that investors now believe Europe’s woes will put these regions at risk of a severe deterioration in economic and financial conditions.



Exploring two possible scenarios in Europe can help us understand if this fear is justified: (1) a complete eurozone breakup, and (2) a painful and long deleveraging which pushes the European economy close to or into a recession.



Those who strongly believe in the first scenario have reason to be worried. A eurozone break-up involving any of the major economies would have disastrous global consequences. We would see a domino effect on sovereign debt defaults; the collapse of the European financial sector with global shockwaves; and foreign exchange markets plunged into chaos by the sudden disappearance of the wo...