Will the euro survive?

Pessimists, often the other side of the Atlantic, are predicting the disintegration of the euro. Is the single currency, established with such hope at the start of a new millenium and until now steadily creeping east, really threatened with extinction?

Reuters

Many economists expect the euro to reach a par with the US dollar. It fell below the US currency shortly after its birth but later soared way above.

That pleased the finance market operators but not many of the eurozone’s exporters, whose goods and services were often priced out of world markets by the exchange rate. In May European Central Bank president Jean-Claude Trichet asserted that the euro is not in danger, but faces a critical situation, all the same.

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Europe, he told the German weekly Der Spiegel , needs a “quantum leap” in ways eurozone governments manage their budgets. Failing that, financial markets may faint with fear that Greece’s huge debt problems will spread to other eurozone lands.

But Trichet remains confident about the zone’s single currency.

“A currency which keeps its value fully in line with its definition of price stability - with annual inflation rate of less than two per cent, close to two per cent - over almost 12 years is a currency which inspires confidence,” he declared.

Far less optimistic is former US Federal Reserve Chair Paul Volcker. Currently an adviser to US President Barack Obama, Volcker voiced concerns about a potential “disintegration” of the euro .

In the Americas, notably the US, and in Asia there is simmering concern about being impacted by contagion from a banking or a sovereign-debt crisis in the European Union,  mainly the eurozone.

Even if the ECB chairman’s recommended quantum leap actually materialises, it will still mean slow if not negative growth in the EU, something that can only damage world economy recovery.

For most analysts, the trillion euros or so of loan guarantees agreed by the eurozone governments in May simply buy the eurozone time. In other words, many expect Greece and possibly some of the other ailing states not to be able repay debts incurred.

Josef Ackermann, chief executive of Deutsche Bank, openly doubts that Greece will be able to repay all its debts in spite of the 110bn-euro rescue arranged by its eurozone partners and the IMF.

There’s another, bigger, package worth 750 billion euros for all-comers, meaning Portugal, Ireland, Greece and Spain, the Pigs group.

All that money, if and when tapped, will primarily serve to repay the big banks who lent to the ailing southern European economies in the first place.

But if Athens, Lisbon, Dublin, Rome or Madrid were to default, investors may question whether French, German and other banks, which lent them the money, could withstand the potential losses. Any doubts that they can’t might spark a panic that could reverberate throughout the world financial system.

If debt restructuring actually happens in a few years, Greece and maybe some others will have to negotiate new debts to repay old ones, but for a possibly longer period.

If all goes well with Greece and the others, the euro will continue as the single currency. If not; it might well be back to square one, that is the end of the euro.

The eurozone means a single currency in a diverse area with sovereign states each doing things their own thing in matters economic, social and political. Neither the eurozone with its 16 member-states, nor the larger European Union with its 27, has a genuine central or federal authority.