Is this the beginning of the end for the Euro?

The recent events unfolding across Europe and in particular the southern European states of Greece, Italy, Portugal and Spain have the makings of a cataclysmic financial event. Potentially greater in importance and impact as the subprime meltdown in the US that led to the “Global Financial Crisis” and from which the rest of the world is just starting to recover.

The Greek tragedy as discussed by many commentators such as Dr Hussain Rammal (see link below), pointed to the necessity of the European Union to support the Greek economy and bail it out. The EU and IMF have indeed proposed a bailout plan and Greece has had to accept it. Why is this such an important an event?

Normally when an independent country such as Greece goes into a financial crisis, it would be able to use monetary control levers such as devaluing its currency, thus giving impetus to its exports and encouraging foreign direct investment due to the cheap cost of labour, cost of manufacture etc. As Greece is in the Eurozone, and holds the euro as its monetary unit it is reliant upon the European Central Bank (ECB) to manage the currency. And the ECB is not going to devalue its currency when it has to manage the larger economies of Germany and France which are much stronger. This leaves Greece in an awkward position of trying to manage its financial recovery with one hand tied behind its back. This is exactly why the EU has had to step in and offer structural and financial assistance.

Obviously, the money for this bailout has to come from somewhere and Germany and France as the largest economies in the Eurozone are the ones who ultimately are footing the bill for the Greek Bailout. A look at the German Newspapers and online media will show that this is clearly unpopular, and may become politically unpalatable for the German government. This is no real surprise.

The biggest problem as I see it for the Eurozone is not just this bailout for Greece. It is more so the potential domino effect and precedent that it has set for equally struggling Eurozone economies in Portugal, Spain and Italy. Portugal has just today had its credit rating downgraded two places, ensuring its borrowing costs will be much greater, and there are concerns in the financial markets that Spain and Italy are in equally precarious positions. These three other southern European economies are all larger than the Greek economy and their debt is larger. Who is going to finance their bailout? Portugal is almost certainly going to need help, and Spain and Italy are just holding on. The cost to the EU will be substantial if they need to bailout these other economies. It could potentially bring about another global financial crash greater than that seen in 2008/2009., watch the financial markets in the coming weeks to see if a financial virus has been set loose, as it did after Subprime meltdown in 2008.

What alternatives are available to the EU?

Very few realistic alternatives are available. However, I would be prepared to predict that, the EU will have to offer a similar bailout package to Portugal in the coming months. In addition to this I expect to see a winding back of membership to the Eurozone, with Greece and Portugal the first to leave. A single monetary unit was a success in the boom days, but its weakness is too evident in a major downturn that we have seen in recent years. The Euro is not dead yet, but it is in hospital and on life support. When the money runs out, expect to see the Eurozone reduce to the central European economies of France, Germany, Austria and Italy. The rest will be left to rue the days they joined the Eurozone club, and return to independent currencies.

See Dr Hussain Rammal’s Article here: “Averting a Greek Tragedy”

%d bloggers like this: