First Greece, then Ireland, and now?
The eurozone is in a bit of a mess, and the way out is unclear. European leaders who met for a crisis summit mid-December felt the pressure to create a permanent debt mechanism for 2013, when the temporary European Financial Stability Facility (EFSF) will run out.
This sounds rather productive – however, talks about the possible creation of common euro bonds were abandoned (German chancellor Angela Merkel and French president Nicholas Sarkozy had agreed on a ‘no’ to issuing joint government bonds for eurozone states at their 13th Franco-German Council of Ministers meeting only days before the EU summit). Also, the group remained unwilling to enlarge the EUR 750bn rescue fund.
What does the future bring then?
After credit rating agencies Standard & Poors, Fitch and Moody’s have downgraded their ratings and outlooks for Ireland and Portugal, Moody’s has already warned it may downgrade Spain’s debt as well. Calls for an end to the common currency, however, are short-sighted.
Former market analyst and finance lecturer at Cass Business School (City University London), Simon Hayley, says that leaving the European Monetary Union (EMU) would not be an alternative to government default on the contrary, it would probably trigger default.
Worse, all government debt became denominated in euro on joining EMU. Bondholders would not accept repayment in a new currency that had just been invented – they would regard this as default by another name. A country leaving EMU would find its fiscal problems made worse rather than better. Its new currency would depreciate significantly against the euro.
There is no choice but to stick together. And even though it might be hard for politicians to defend huge bail outs against their voters, leaders agree. In his New Years address Sarkozy announced:
The end of the euro would mean the end of Europe. I will oppose this backlash with all my strength.
In her corresponding speech on the last day of the year, Merkel also pointed out the Euro’s importance:
Germany needs Europe and our common currency. For our own well-being as well as to solve global tasks. We accept our responsibility – even though this sometimes proves very hard.
Politicians, scholars and analysts agree, the Euro must be sustained. However, at least the people’s representatives need to try and get the support of the people…
