Nearly a year ago the first cracks started to appear in the Euro project as Greece had to be dragged kicking and screaming to ask for a bailout, after the country ran out of money to keep funding itself.
At the time, some speculated that this could be the beginning of the end for a project that started in 1999 with the launch of a single European currency. A launch that saw its supporters argue would bring greater cohesion and fiscal consolidation to Europe.
Since the Maastricht Treaty in 1992, European countries have been encouraged to meet supposedly strict Euro convergence criteria in order to gain entry to the single currency.
Those criteria called for an inflation rate of no more than 1.5%, and an annual government deficit to GDP ratio of no more than 3%.
It now turns out that some countries were less than honest with their bookkeeping when it came to these criteria. Nevertheless, eager European politicians pushed forward with their project of unifying different European economies under one monetary policy, despite the obvious differences in the structure of these economies.
This hastiness now looks as if it could have far reaching consequences, not only for the indebted Eurozone periphery, but for Germany as well.
The Credit Crunch
With countries like Greece, Ireland, Portugal and Spain benefiting from historically low German interest rates levels, a credit boom ensued which saw overleveraging on a large scale.
Property booms in Ireland and Spain saw an explosion in credit and, when the credit crunch hit in 2008, the proverbial chickens came home to roost.
Property values sank and banks started to fail, which resulted in large-scale government bailouts to prevent an implosion of the European financial system.
The hope was that the implementation of a joint IMF/EU €440bn bailout package would stabilise markets and act as a circuit breaker and assuage fears of a contagion effect spreading through the financial system in Europe.
This, it was hoped, would prevent a spill over to Spain and/or Italy, who would be too big to save.
In exchange for funding, to keep things ticking over, European countries would implement searing austerity measures in order to get their burgeoning deficits under control.
The result was slashed government spending, higher taxes and rising unemployment as European governments sought to protect senior bondholders from haircuts in an attempt to prevent large scale dumping of government debt.
As a result of the credit crunch, politicians demonised bankers as architects of the financial crisis. While this played well for them politically, and was partially true in that irresponsible lending caused the problems currently being experienced, it overlooked the part governments and central banks played in the credit bubble.
Political Consequences of Austerity
The political effect has already been felt in elections throughout Europe as governments across the region have felt anger from voters at their handling of the fiscal crisis.
Protests in Greece, Ireland, Portugal and Spain show that austerity is now starting to hurt and, with no end in sight, attention is now turning to senior bondholders who are being protected while people lose their jobs, taxes go up and growth plummets.
Election defeats for Angela Merkel in Germany also show that Germany is uncomfortable with being the paymaster for the rest of the Eurozone. Especially given that if contagion spreads they will be asked to pick up the tab for keeping the Euro project alive.
Having spent the last 20 years paying for the integration of Eastern Germany, the thought of paying the debts of the rest of Europe for the next 50 years could be a step too far.
It is now becoming apparent that a tipping point could be about to be reached as voter unrest adds a political risk that one of the peripheral countries will lose its appetite for austerity and default on its debts.
The weekend Spanish regional elections dealt a massive defeat to the incumbent socialist government as voters protested about 20% unemployment and youth unemployment of over 40%.
Is a Break Up of the Euro Inevitable?
With concerns about Greece’s ability to meet its fiscal targets in exchange for the next €12bn of funding, some EU politicians have acknowledged that a soft re-structuring may have to be considered for some of its debt.
This idea has not gone down well with the ECB who hold a large amount of Greek bonds, and if implemented, it could prompt calls from Ireland and Portugal for similar treatment.
In any case, it is becoming increasingly obvious that Greece cannot meet the terms of the bailout, let alone even start paying down its debt, especially with two year bond yields at 26%.
Lawmakers remain vehemently opposed to any type of restructuring, warning that if Greece were to leave the Euro the consequences would be even worse than the current situation.
The fact is, given the level of debt currently weighing on Greece, a default looks more or less inevitable and, given increasing voter discontent, policy makers may well have their hands forced with respect to Greece leaving the Euro.
Maybe policymakers should ask themselves the question from a different standpoint and ask themselves what will happen if Greece is allowed to stay in?
Even if Greece was able to grow its economy and pay off all its outstanding debts, which seems unlikely, how long will it be before its economy is ever able to stand on its own two feet and grow into prosperity?
It certainly won’t happen overnight and perhaps, although it may seem the worst option now, Greece defaulting and leaving the Euro may turn out to be the better option in the long term.
One thing is certain, the next few weeks and months will be trying times for the single currency on the financial spread betting markets. Whatever people’s views of the rights and wrongs of the Euro project, the effects of the events currently unfolding could well resonate for some time to come, whatever the outcome.
Already the single currency has hit record lows against the Swiss Franc on the FX spread betting markets and all-time highs against gold.
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'Forex Spread Betting: Is a Break Up of the Euro Inevitable?' edited by DB, updated 26-May-11
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