2nd December 2010
Germany is already denying the possibility of greater fiscal union. But equally, the potential for a break-up has been widely debated. Is there a likely outcome for the Eurozone?
The structural imbalances in the Eurozone exposed by the credit crisis have led many to conclude that its existence is untenable. This Reuters piece covers the key reasons:
However, in the short-term at least, policy-makers appear to be buying time with continued bail-outs. While these go some way to addressing the shorter-term liquidity problems, they have not addressed the solvency issues that lie at the heart of the Eurozone's problems. Although theoretically, resolving the liquidity issues could provide sufficient time to address the solvency issues through austerity measures, with interest payments for much of peripheral Europe running at a huge percentage of (waning) GDP, this seems a long shot.
As jonlivesey points out on the Telegraph : "Every time I think the EU has issued to most ridiculous statement ever, they outdo themselves. Today I read that Ireland will pay back its $100bn loan in ten years. Pardon, ten? That loan is $50,000 per taxpayer. The Irish taxpayer is going to stump up $5,000 per annum? Or maybe the money is going to come out of the Irish boom. Wait, the economy has shrunk by 15%. Or pensions, no, they are only $20bn."
If the ambitious austerity measures do not work, the choice in the long-term is stark: The Eurozone must expand or break-up. If it is to expand, then closer fiscal union would be one solution. The Germans have already resisted pressure to build such a union, considering – perhaps rightly – that they would be the ultimate losers. However, the fact that they are denying it suggests it is at least on their agenda. Although fiscal union is politically awkward, if not impossible, it has some logical merit as Prof Stephen Haseler discusses here.
The other options involve a break-up, which would either take the form of the weaker countries being thrown out, or the stronger companies leaving. The effects in both cases are potentially severe. Azad Zangana, a European economist with Schroders, says: "I'm not sure you can ‘exit' the single currency without 50-80% deflation in individual currencies. This could lead to hyper-inflation very quickly." This BBC piece gets to grips with the logistics of a potential exit: .
ECB President Jean-Claude Trichet said this weekend that people should not underestimate the determination of the Eurozone countries to act to ensure it remains in place. Certainly, there is a lot of political will behind its maintenance. However, the situation is a mess and Zangana suggests that the chances of an orderly resolution to the problems are limited. The choices faced by Eurozone policymakers are uncomfortable at best and to date, they have shown themselves unwilling to accept reality. Reality may be forced upon them.
Expatnhappy responded to us on the Telegraph comment boards, saying:
"the options are the PIGS need to raise huge sums of money in next few months, there are limits of solvency on what they can afford; if they are shut out of market at reasonable rates then only option is to borrow from IMF and Europartners (really Germany). Both cannot afford to bail out Portugal, belgium and Spain and certainly not Italy without ECB magically printing Euros, which has been ruled out. So, Euro is over when current "bail out" funds exhausted, which will be when portugal, begium and Spain start making demands. Germans will give no more and no one else can afford to.