Blog: What would a euro break-up look like?

The German central bank told me in no uncertain terms last week it was not printing Deutsche Marks, despite growing speculation - and a number of sources - pointing to the contrary.

Regardless of what the Deutsche Bundesbank says, the world is already taking steps to make sure it can cope in the event of a single currency breakup.

Anecdotal evidence suggests employment agencies in Europe are writing clauses into contracts so that the equivalent wage in another currency will be paid to employees if the euro dissolves.

Meanwhile, companies across the globe are trying to limit the amount of cash they hold in some European states, only selecting banks which operate in ‘core' nations, and using derivatives to limit exposure to counterparty risk.

The truth of the matter is that countries including Germany and Ireland, both of which are at the centre of such market chatter, would be foolish not to take precautions.

The euro has undoubtedly been rocked to its core by the sovereign debt crisis, and its future survival is dependent on a bunch of squabbling politicians who must put aside national sovereignty to ensure its continued existence.

While the early signs of such union have been fairly promising, today signs of strain are sowing, and the real issue of a lack of growth and no money to kick-start struggling economies remains unchanged. Unless GDP starts to tick up, we could feasibly see more downgrades and spikes in government debt yields once more.

This vicious cycle has played out throughout this year, to the point where exiting the euro looks increasingly attractive for a number of countries - notably Greece.

The obvious argument for going it alone is devaluation. It is widely expected that if Greece, for example, was to reinstate the drachma, the currency would immediately tumble in value, making exports look attractive and thus eventually boosting growth.

But, and it is a big but, while previous monetary union splits - such as Ireland from the UK in 1979 - caused few ripples, the disintegration of a region as large as the EU would undoubtedly have much more serious repercussions.

Looking back in history provides few examples of breakups on any kind of similar scale.

The removal of the Austro-Hungarian currency union was one of the larger splits, and led to the state enforcing conversion into the new currency, while using the opportunity to seize assets.

In today's world, such a seizure is unlikely, but other problems would be just as monumental.

How would banks with assets across dozens of countries reconcile all their contracts, and in what currency? What would happen to the value of assets? And these issues are likely just the tip of the iceberg.

Understandably, strategists are worried. UBS reportedly labelled the consequences of a breakup "so enormous as to be unimaginable".

Schroders' European economist, Azad Zangana, said the uncertainty a breakup would cause would halt trade and investment in the region for a time, creating a 'tremendous' loss to the economy.

It is this kind of fear which may well force politicians to settle on a solution rather than allow a split.

One thing is clear - markets will not put up with the "muddle through" response we have seen so far. Yields are either at record highs or lows depending on which side of the fence markets have deemed countries to be on, and for pivotal economies like Italy (which is seeing its 10-year debt yielding 7%) the situation is not sustainable.

Watch those printing presses......