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Will the Euro Survive?

By Andrew Zvirzdin

With its tenth anniversary on January 1, 2009, the euro has come of age. Sixteen European countries now use the euro as their national currency and the popularity of the euro for foreign reserves is on the rise. Policymakers have breathed a sigh of relief as the currency has so far withstood the current economic downturn, including crises in large multinational banks such as Fortis and Dexia.

But congratulations are premature. The euro area has yet to demonstrate its cohesiveness when confronted with the growing economic divergence of its member states and even the specter of a sovereign debt default.

This week, the S&P downgraded the credit rating for Greece's government debt, and warned that Spain, Portugal, Italy, and Ireland may soon be next. The warnings come as national governments in these countries struggle under high levels of government debt that will only increase due to the global recession. Yield spreads over German bonds have climbed to record levels throughout the euro area, implying that investors are demanding a greater return on debt to compensate for the growing probability of a breakup of the euro area or even a government default.

EU officials do not want to contemplate these scenarios, and they have little precedent or policy guidance in dealing with such possibilities. But the diverging yields on government debt are worrying, particularly as Eurozone countries are hoping to sell over $1 trillion in government debt in 2009. Even Germany has struggled to find buyers for its debt, as an auction of its sovereign debt failed last week.

Financing growing government deficits will be a difficult task in 2009, particularly for countries on the edges of Europe like Ireland, Portugal, Spain, Italy, and Greece. As fiscal policies diverge among member states, the euro will come under increasing pressure as investors contemplate a possible breakup of the Eurozone. Leaders will have to act together to show their commitment to preserving the single monetary policy in the euro area. Only after the euro has fully weathered this current recession will it deserve a birthday party.

Andrew Zvirzdin is a graduate student at the Johns Hopkins University Paul H. Nitze School of Advanced International Studies (SAIS) Bologna Center in Italy.

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The views expressed are those of the author and do not necessarily represent those of the Johns Hopkins University.

Comments (27)

mibrooks27 Author Profile Page:

The one bright light I see is the stock market falling after Obama's inaugural address. It appears that the subhuman cockroaches and vermin that have bled this country dry may have an inkling that their reign of terror and greed is about to end. Europe is making some necessary changes to curb the ability of these international criminals to perpetuate their swindle upon them any longer. Least we all forget, this depression, this international economic crisis, was created right here, and exported to the whole world. The fraudulent financial packages, the sub prime mortgage swindle, the manipulating of oil and other commodity prices, all of it, an American invention by our Wall Street scum. The current calamity was entirely avoidable. All of the pain and suffering, the deaths, the wrecked families and lives ruined, all of the coming catastrophes is due to these animals. We need international courts to hear the evidence and try these criminals. Not since Hitler's armies rampaged across the globe has such a small group of men and women wrecked such harm upon the world. Try them, hang more than a few, imprison the rest in a genuine hellhole prison in China or Europe instead of some U.S. country club, but make them pay for their crimes against humanity.

zvirzdin Author Profile Page:

It is certainly too early to write-off the euro area. But it is also too soon to declare it a resounding success.

Paul Krugman has some interesting comments on the plight of Spain, in light of its credit downgrade today. His perspective suggests that Spain is between a rock (the recesssion) and a hard place (the Euro). According to him, "the Euro may well be making things worse." What do you think?

http://krugman.blogs.nytimes.com/2009/01/19/the-pain-in-spain/

mibrooks27 Author Profile Page:

I'll make you a bet - the endangered currency, the country and society that is at greater risk of collapse, is the U.S. Even in the full light of the consequences of globalization and free trade, we still permit, even encourage, the outsourcing of millions of jobs, politician's threaten to increase the number of H1-B visas even though more than 3 million U.S. workers have lost jobs due to that bit of insanity, we continue to allow the offshoring of basic manufacturing plants and technology, and we allow foreign governments like China and India to purchase and control businesses critical to our national survival. We are, in a word, committing national suicide. This entire economic meltdown is due to free trade and everyone knows it, 80% of the voting public wants it stopped. The politician's answer is to ignore that, ignore reality, and feed at the slop trough created by corporations and foreign governments. We haven't got a chance of surviving.

ttraub Author Profile Page:

This article is somewhat surprising. The U.S. has serious problems of its own, such as a trillion-plus federal budget deficit for FY2009. That's a trillion dollars in one year, and all to bail out a bunch of crooks and deadbeats and failed industrialists. I would rather have the unity and linguistic/cultural problems of Europe than the bankruptcy problems that the U.S. is now facing.

tropicalfolk Author Profile Page:

So, S&P downgraded Greece' debt to A- because of a weak economy and a growing fiscal deficit...

But

S&P doesn't even bother to rate US Treasury bonds DESPITE the sinking economy and the skyrocketing fiscal deficit in the US.

Zolko Author Profile Page:

@ slim2 : "An old saying about Europe is that Heaven in Europe is when Germany controls the money and Italy the military."

NO WAY: the German are supposed to be mechanics (to repair cars) and Italians are supposed to be the lovers. Where are you from ? Italy controling the army ? Like Mussolini ? And those that are supposed to control the money are the Swiss !

maggiee Author Profile Page:

I get so tired of articles like this declaring doom and gloom for the EU/Euro. It's like they're written by Americans who haven't bothered to actually look at all at the realities of the EU. These are, no doubt the same people who declared with certainty that the French would never give up the Franc and German's would never accept the Euro. The EU and the Euro are a lot stonger than people give them credit for. The EU/EEC is over 50 years old. The currency was introduced, on time, on a time table conceived decades before it's debut. It was intended to be at parity with the dollar and it pretty much was until the dollar tanked in 2003. I don't see anyone rushing to abandon the Euro. In fact, the dollar is probably in far bigger danger.
The article sites the particular problems of Ireland, Portugal, Spain, Itlay and Greece. All of these countries have improved GREATLY for being in the EU. Ireland in particular has benefitted; shedding it's Third World equivilency for the first time in modern history. Sure the individual economies and the economy of Europe in general are in trouble...like the rest of the world, but it's too early to write the Euro's epitath.
Lastly, just to correct a few people on this site; the UK, although a member state, does not use the Euro and Norway neither uses the Euro nor is a member state.

skata3 Author Profile Page:

This is not an issue of what the taxpayers want Andrew. It is more or less what the government they have elected will decide. As we have all seen governments do have ways to convince voters, as for the German government it appears to be strong both domestically and abroad.

Looks like European economies have been managed considerably better than our own. Take a look on Norway for instance. Crisis? what crisis? Of course the North Sea Oil has helped them a bit. Still, countries less affected, were those with strong currencies and preemptive market regulators. That is unlike us, as it seems we lacked both. And by the way, we are supposed to know who lost money with the meltdown but isn't there anyone curious enough to inquire ον who on the earth has benefited out of this mess? For some must have, haven't they? Where have the monies gone? Aren't there accountability issues that need to be attributed? What about Greenspan, has he been an accomplish or a fool?

Let us keep an eye on these Europeans and try to learn a thing or two from them. For pretending that we know everything appears to be rather simplistic to say the least.

zvirzdin Author Profile Page:

Wolfgang Münchau has a good article today in the Financial Times regarding the future of the euro area. He believes that under no circumstances will the Eurozone collapse, even if a country were to default. Rather, he argues that other countries would be compelled to bail out the default country to prevent contagion.

I am still not convinced. Would German taxpayers be willing to bail out the country of Greece? Not only would such a scenario increase moral hazard, it would also undermine political support for the euro and perhaps the entire EU. Democratic support for the EU is already rather threadbare.

What do you think? Is European unity strong enough to withstand "worst-case scenarios?"

Münchau's article is here: http://www.ft.com/cms/s/0/1515cc56-e593-11dd-afe4-0000779fd2ac.html

infospr Author Profile Page:

For a currency to be succeessful, it is very
important that the distribution of currency
from "currency printing" to "business" be made a
non profitable activity.

dummy4peace Author Profile Page:

Although the Chinese gigantic exports of material goods might have contributed to the lower crime rate on personal properties in the US, the consumer trend in Europe is not affected as much as it has been in the US. If interested, check out this page on education on ecology for consumers.

http://www.consumer-education.eu/?f_cid=3

When I visited my EU friends, I noticed that they don't keep lots of junk around the house as we do in the US. They buy everything carefully and plan the purchase in advance for the long term. It's not that they don't have money to buy more, but they don't want to consume anything unnecessarily because of their concerns for the environment. In this case, paying a little more for a cup of coffee isn't as bad as we would think otherwise. EU consumers are more educated consumers and they know what and when to buy carefully. For one thing, when they buy, they buy quality goods that last to reduce the need for more (trash) landfills. This is something we should teach in our public education in the US. We should manufacture and consume with our environment in mind.

petersmeets Author Profile Page:

Please, come and see, have a coffee or a beer in Brussels, Rome or Paris, and you'll experience what a strong Euro means when you'll start thinking where to have diner...

kevinschmidt Author Profile Page:

Don't you mean "Will the Dollar Survive"?

Never mind the Euro, Europe is doing fine on its own. After eight years of criminal malfeasance, robbing the U.S. Treasury, war mongering and war profiteering, the Dollar has reached historic lows and is continuing to fall.

Thanks for nothing Dubya/dick!

Actually, they left us with less than nothing because now we must deal with muli-trillion dollar deficits.

skata3 Author Profile Page:

These are difficult times and God amuses himself by disproving the forecasts of those who pretend to be experts.

As for the future of Euro or Eurozone the reasoning you provide appears rather shallow I am afraid, not to say premature. This very same can be said for the Forbes article you cite.

This looks like a guessing in the wild, to be forgotten if it fails and only to be claimed if it works. I have seen that over and over again.

Clyde4 Author Profile Page:

What is the difference between the Euro and a currency peg?

The most likely outcome is that some Euro countries accept a lower standard of living than they otherwise would in order to stay in the Euro peg.

slim2 Author Profile Page:

Unless the EURO is controlled in some measure by the Bundesbank it's likely to fail. An old saying about Europe is that Heaven in Europe is when Germany controls the money and Italy the military. H*ll is the reverse.

SumtinWong Author Profile Page:

Forthcoming European financial turmoil is already priced into the stock market and will in general benefit the USD dollar, as more foreign governments sart to rethink their policy to replace USD with Euro as a standardized monetary reserve, thus benefitting already rising USD as more investors rush up to buy USD. So Euro downfall is less of concern till it reaches levels of less than 0.80 Euro to 1 US Dollar (a decade worth of work).

The situation on home front is one that definitely is something to worry about - DJIA and SP500 are near about it 10 year low. Compare this to Nasdaq Composite which is well off its 10 year lows. USD has almost recovered it lost value. Is this divergence a good or bad omen for investors looking to invest in US and for financial leadership?

As for me, only thing worse than walking a dog, is walking a CAT, to meet someone, as it puts one in an altogether different category of dating game.

ngray2 Author Profile Page:

The death of the Euro has been prematurely reported. As the world population increases and ease of global travel increases the concept of a few unified global currencies make so much more sense for so many reasons. There may be setbacks and pitfalls along the way but the euro is the future for all of the European continent. Prior to the Euro, business in EU routinely lost thousands to millions of their individual units of currency in conversion costs as their goods and services were sold around the continent. Why would anyone want to go back to that? The real question is not what is the future of the euro but what is the future of the British Pound?

dummy4peace Author Profile Page:

All my British, German and French friends feel very comfortable with using the Euro and EU. I can't share Mr. Zvirzdin's concerns yet.

dnjake Author Profile Page:

It is premature to say. There still seems to be widespread belief that our current problems are a blip that will disappear with government aide. Under the more likely scenario where we are in a once in a century watershed event, we are going to see a long adjustment to new econcomic realities. Only as that process plays out will the extent of political disruption become clear and the quality of decision making in all the different parts of the global economy. Under strain it will be surprising if different national interests don't become more prominent.

afranzgrieg Author Profile Page:

The Euro is here to stay, as is the EU. The Europhobes, mostly English(the Economist, Daily Telegraph, etc.), have just about run out of rope since their various predictions have never come to pass.
Besides, what alternative would they offer?- sterling?, the US dollar? No way!

DutchyDC Author Profile Page:

The Euro and indeed the Union is doomed to fail since its genisis is economic and not cultural or even nationalistic. It is therefore rooted in greed an unfit soil for nation building.
The current crisis will loosen any strings which tie it together and the increasing instability will tear the Union apart.

zvirzdin Author Profile Page:

I am not thrashing the currency, but rather saying it has yet to really prove itself. The euro area has had a decade of good luck and relatively stable growth. But currencies can do strange things in recessions. It is certainly true that the euro has helped stabilize countries during the early part of the recession, especially the small countries. But what if the recession continues? Worse, what if the recession continues in some euro area countries but not others?

There is a crucial difference between the United States and the euro area: the United States has a federal fiscal policy but the Eurozone does not. So what would happen if one of the euro area countries declares default on its sovereign debt? There is no transfer mechanism between member states, and I highly doubt it would be politically feasible to create one. Granted, there is little immediate chance of default, but I think markets are pricing it as a possibility.

desmond8819 Author Profile Page:

As if the dollar was the strongest currency around. About time you realized that there is another currency on the block and it here to stay. As for the Brits, well ask Gordon for his famous 5 tests on joining up,bla bla bla, when all is said and done they will rue the day they didn't .Seriously do you academics really do your homework or just run with it. There are significant differences in all the key economic data in the individual states making up the US and other areas within the dollar parity area and it still works. Bottom line focus on how things work and evaluate their strengths as opposed to thrashing.

ckk2008 Author Profile Page:

No worry as long as the Germans and the French do not jump ship anytime. Also there is the British coming to the rescue in dire straits of the continental europeans.You remembered the British had done in the past!

Citizenofthepost-Americanworld Author Profile Page:

I would worry so much more about the US$'s future than about the Euro's... Really!

Erik_J Author Profile Page:

You are right about the spreads but how did they get so large? If you look at the data, you will see that Greek bond yields are still lower today than they were during the downturn in the early 2000s. The problem is that German yields are lower still -- and falling. Greece isn't paying a price for profligacy. Germany is reaping the "benefits" of a flight to security. Of course this new demand for German bunds is not infinite and some auctions may fail. But that does not mean that Greece is in the weeds. Indeed, Greek long-term interest rates are negative in real terms. And short-term interest rates are the same across the Eurozone as a whole. Compare that to the early 1990s -- when Greece was paying 26% interest on long debt, the term structure of Greek public borrowing was much shorter, and the fiscal cost of debt servicing was huge. If that is the alternative to the 4.5% that Greek bonds are yielding inside the Eurozone, then what is the incentive for them to go out? Of course I agree that it is hard to party in the midst of a deep global financial crisis. Even so, I wouldn't worry about the eurozone falling apart any time soon.

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