Will the euro survive?

18th August 2011

The eurozone drama is set to continue, and there is one question that persists: Will the euro survive?

Here are a variety of opinions:

Of course it won't, Nouriel Roubini argued in the Financial Times (paywall) back in June when Athens was on fire as people protested the harsh austerity package necessary to secure a bail-out.

The zone, he wrote, is an artificial construct that simply doesn't work, given the incompatibilities between slow-growth members like Greece and dynamic economies like Germany. 

He says: "Of course today the idea of leaving the euro is treated as inconceivable, even in Athens and Lisbon. Exit would impose big trade losses on the rest of the eurozone, via major real depreciation and capital losses on the creditor core, in much the same way as Argentina's "pesification" of its dollar debt did during its last crisis.

"Yet scenarios that are treated as inconceivable today may not be so far-fetched five years from now, especially if some of the periphery economies stagnate. The eurozone was glued together by the convergence of low real interest rates sustaining growth, the hope that reforms could maintain convergence; and the prospect of eventual fiscal and political union. But now convergence is gone, reform is stalled, while fiscal and political union is a distant dream."

Elsewhere, Walt Kowalski comments on economist Mindful Money blogger Shaun Richards'post: "…if the French can't meaningfully participate, I have real doubts about the Euro currency's survival.

Shaun Richards says: "Do I think the euro will survive? No. There are two routes out – one is greater fiscal integration and political union which in the end is likely to be rejected by voters in the "surplus" countries such as Germany. We saw an example of that with opinion hardening in the recent elections in Finland. Over time, as the cost of keeping the system rises I expect there to be more opposition which will in the end overpower the political pressure for a union in Europe."

David Marsh, financial specialist, business consultant and writer on political, economic and monetary issues has written a second edition of his book about the Euro. Interestingly, says Economics Intelligence, the title of the book has slightly changed. Instead of "The Euro: The Politics of the New Global Currency" , the book is now entitled "The Euro – The Battle for the New Global Currency".

Here, in a video interview, David explains why he thinks the euro will survive, albeit with a completely different character. Greece, he thinks, will voluntarily decide do leave the single currency at some point of time.

Simon Ward, chief economist at Henderson, who also writes a Mindful Money blog, says: "I think the euro will survive if the ECB now embarks on a major U-turn and eases policy aggressively.

"The current crisis reflects a contraction in the Eurozone real money supply that began in late 2010. Incredibly, the ECB has tightened policy into this contraction, sending the economy on a course towards a recession. As growth disappears, sovereign debt and banking markets are freezing.

"The majority of the ECB Governing Council would probably support policy easing but is afraid of the Bundesbank and its allies. Incoming President Draghi should throw down the gauntlet to the Bundesbankers and propose interest rate cuts and a large-scale expansion of bond purchases – spread across national markets rather than focused on Italy / Spain.

"Sufficiently aggressive action would restore growth, in part by allowing the euro to depreciate. Fiscal retrenchment plans would then have a chance of success and fears about banks' balance sheets would ease.

"If EMU is to break up, let it be through the voluntary withdrawal of Germany rather than the forced exit of peripheral economies forced into depression by hardliners masquerading as monetarists."

What about a world currency?

Walt Kowalski comments on economist Mindful Money blogger Shaun Richards'post: "These currency games and Bernanke's "beggar thy neighbor" policies are very dangerous. Shaun.. do you ever see a day when there will be an international currency standard…?"

Shaun replies: "…If you go for a world currency who would run it? In some ways the IMF is more of a money printer than Benny and the (ink)jets as the way it magics funds into the air is rarely reported but terrifying. As I pointed out when Mme Lagarde was appointed she was a poor choice and with her track record she would be a dreadful choice to run a reserve currency…"

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