Does the Euro Have A Future

Debt Crisis – Important Failings in Design of Eurozone

Debt crisis in Europe had indicated the important failings in the design of Eurozone and predictions stating that the growth would be returning have not done much to inspire confidence according to Emma Alberici. Top economists and politicians besides Former Chancellors Alistair Darling, Nigel Lawson and Norman Lamont convey that the Eurozone cannot survive in its current form.

 During the interviews and articles for The Independent today, they were questioned on their short-term as well as long term prediction for the future of the euro. Though several are of the opinion that the Eurozone could be surviving the current Greek debt crisis particularly, if the political will invest in preventing disorderly default, none are confident that it would stay on.

They are of the belief that the new European Fiscal Compact that has been agreed in principle recently is unmanageable since it would take key financial powers from the national government as well as their electorates. Several of the economists and the politicians have disapproved the rush to strictness imposed on Italy and Greece recommending that it would be counter-productive by depressing growth and competitive imbalances among Eurozone members would be difficult to overcome. They had recommended that the ultimate consequence of the crisis would be quite a smaller Eurozone with Germany at the centre and countries like Greece, Italy, Ireland and Portugal on the external.

ECB Dropped Official Interest

As per Budget Papers `recent policy action in Europe has meant that some of the worst crisis risks have abated since the end of 2012 and global conditions are expected to gradually improve’. It is now over a year since Mario Draghi, European Central Bank President, had been credited with saving Europe by informing financial markets that he would do `whatever it would take’, to save the euro, which scarcely counts as `policy action’ and Mario’s subsequent move are still to yield any apparent success.

ECB had dropped official interests to 0.5 percent for the Eurozone and the Central Bank also had indicated that it was `technically ready’, to cut the deposit rate from the prevailing zero percent to negative territory. It would need the ECB to charge banks for safeguarding the money which would make it smart for the banks to extend credit to household as well as businesses instead of holding their money in Frankfurt, which is at the ECB headquarters.

Lower interest rate do not boost growth as they did early since people in Europe and Australia tend to be extra cautious when it comes to borrowing. With unemployment in the Eurozone, having a record of 12.1 percent, smaller numbers of people tend to have the capacity of repaying the loans they may have.

Severity – An Anti-Growth Approach 

All over Europe, severity has been considered as an anti-growth approach though no reliable alternative has come up to bring back life in the 17 countries that tend to share a currency. Vice president of the European Commission responsible for the euro, Olli Rehn, sounded the only strong note of optimism and predicted that the currency would emerge stronger from the crisis.

He stated that they would be undertaking nothing less than an economic reformation of Europe and step by step, they would be creating financial stability and the conditions for sustainable growth and job creation. However Mr Darling commented that he does not thing anyone could realistically say the Eurozone would survive with its present membership and the longer the inaction goes on, the greater the chance that one or more countries would be forced out.

Eurozone not About to Collapse but Survive …..?

Professor of Economics, Dartmouth College, Danny Blanchflower, commented that `the fundamental problem which has not been addressed is that there is no growth plan for Greece and even if a new loan is given to them, they will have no means of paying it back. The markets seem to have been priced in an orderly default.

The problem lies in a disorderly default which means default and exit for Greece. There seems to be moments to play out at the final hour though two and a half years down, he has little confidence that there would be an orderly way out’.Professor of Economics, New York University, Nouriel Roubini states his opinion that `the Eurozone is a slow motion train wreck.

 Not only Greece, other countries too are bankrupt. There is a 50% probability that over the next three to five years, the Eurozone will break up. Not all the members are able to stay. Greece and probably Portugal may exit the Eurozone, Greece within the next 12 months while Portugal would take a while longer.

According to Jim O’Neil, Chairman of Goldman Sachs Asset Management, Former head of global economic research at the bank states that `the reality is that too many countries joined the euro in the first place and ultimately without dramatic change, they can’t probably survive. According to some the Eurozone is not about to collapse but whether it could be constant over the long term is not known.