The euro celebrated its twelfth birthday on 1 January in style: Estonia became the seventeenth member of the single currency. But against the backdrop of celebrations in Brussels and Tallinn, fears over contraction, rather than further expansion of the eurozone, grew in strength for the coming year.
Six months ago, Financial Director highlighted dire warnings from several leading economists that a breakup of the euro over the next five years was now the more likely outcome. As one pundit, Mark Cliffe, who is global head of financial markets at ING, put it: “the unthinkable is now thinkable.”
“We are looking at Spain where the 10-year yield is the highest since the introduction of the euro,” says Ian Bright, a senior economist at ING. “It is starting to affect more than the small countries and when you start playing around with Spain and Italy, you are talking about major league problems. We can say that with confidence.”
Capital Economics, a consultancy run by former government adviser Roger Bootle, is sticking to its forecast that the chances of breakup are more than 50 percent. “We continue to think that some kind of eurozone breakup over the next three to five years is probably more likely than not,” says its European economist Ben May.
IHS Global Insight, a consultancy, says there is a one-in-five chance of a country binning the euro and reverting to its national currency by 2016.
As a result, its currency would collapse, which in turn would lead to major debt defaults or restructuring as the value of their euro-denominated debt surged.
Critics of the euro believe that long-term reform is needed and assert that until countries agree to a fiscal union – sharing tax revenues or centralised budgets – to match the monetary union which was put in place in January 1999, the project will remain unviable.
“One reason why fiscal union was not put in place in 1999 was that there was not the degree of solidarity between eurozone member states,” says Stephen Lewis, chief economist at brokerage house Monument Securities. “It seems solidarity is still absent and that’s serious for the European Union objective. If you saw the euro mechanisms collapse then it is hard to see how the European Union could survive that.”
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