The current economic situation in the EU causes serious concerns among investors about the future of the common currency. Some observers anticipate the disintegration of the eurozone and the collapse of the common currency. Others expect some of the eurozone members to leave the currency union. First of all it’s about Greece, Portugal and Ireland.
What solutions does the EU have in store? Is it constant financial injections in the sick economies in the hope to cure them? Does the EU have a lifesaver?
Did the EU authorities anticipate such problems?
The very introduction of the common Euro currency was a risky decision as numerous European countries had different ways of managing their budgets.
Deficit. Besides, the eurozone is used to constant budget deficit. Even though there were some reasonable limits, they were ignored and uncontrolled, which ultimately led to huge public debts in some eurozone states. The latest global crisis (2008) awoken them by it was too late. Greece alone managed to increase its debt up to more than 100% of the national GDP. By the end of 2011 the debt is expected to reach 150% of the GDP. Alas, neither Greece, nor Portugal and Ireland can print more money. The currency is common! Strange as it may seem but nobody cared when the debts were insignificant. However, it became an EU-wide problem when the debts reached hundreds of billions of euro.
Big money. That is when we begin to understand why the EU won’t leave the risky economies in trouble. The eurozone’s leading economies – Germany and France – own 1/3 of Greek T-bonds. In particular, these bonds are owned by German and French banks. Should Greece default, these banks will face severe losses, they may even go bankrupt.
Save yourself. In order to save the banks Merkel and Sarkozy decided to help Greece. This is logical but unpromising. Let’s assume Greece gets another loan. What’s next? The debt won’t go anywhere? It will only grow. Only this time it will be eurozone taxpayers’ money. Sooner or later Greece will need another injection.
Austerity. However this time the EU will give Greece another loan only on tough conditions, including serious spending cuts – a certain austerity plan. But the Greeks are not used to saving and austerity.
Political environment. The peripheral EU states refuse to understand their “elder brothers” and see only the infringement of their own interests. The authorities of the debt-ridden countries are having hard times as the local population treat them as enslavers rather than liberators. Nobody will be glad when their social benefits are cut, thus forcing them to get a job.
Generous elder brother. If to consider last year’s loan to Greece (€110B) and another loan promised this year (€109B) it turns out that for the last 2 years the financial aid to Greece has reached the level equal to 50% of Greece’s GDP. However, the debts still remain unpaid while the economy needs care. Moreover, Portugal and Ireland are next in the line to get some financial aid.
Do the EU authorities really know what they are doing?
According to the analytic team of Roboforex, judging by what the EU authorities have come to and what they are doing now, it is difficult to name any specific solutions. Everything seems to be quite simple – forget about the peripheral states ad buy the risky assets (Greek T-bonds) directly from the holders (German and French banks). But the real wisdom is not always attended by simple solutions:
· The EU is not interested in expelling Greece or any other risky economy from the eurozone. Firstly, there is no point in that as the consequences will be almost the same. Secondly, the eurozone wasn’t created to be disintegrated in a decade or two. The scenario was taken into account when introducing the common currency. That is why the EU is following the plan worked out in the late 1990s, with some slight changes and adjustments.
· It seems that Merkel and Sarkozy’s decision puzzle starts turning into a vivid picture. It is about the creation of the common EU government in order to coordinate the eurozone’s budget policy. This is the very step that has been missing since the introduction of EUR. Better late than never!
· Whatever happens in Greece, Portugal or Ireland, the EU authorities are ready to respond. In any case the EU will provide more loans as a temporary solution. The eurozone integrity is more important, which means the EU and eurozone countries are going to intensify the integration processes.
· Unification is another step offered by Germany and France to force all the members to make equal contributions. By now only the value added tax has been unified. Now Germany and France offer to unify corporate and income taxes. It will obviously lead to the unification of the entire EU budget policy. The creation of a common government will mean a new (painful but necessary) birth of the eurozone.
EUR prospects:
According to the Department of Masterforex-V trading system , EURUSD has come out of the MF sloping channel with a strong downswing – wave C of Daily2 – and headed for the next closest levels of support at 1,3576 and 1,3428. According to them, it is too early to talk about the reversal of the long-term downtrend until the MF pivot is broken.
Market Leader and would appreciate it if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
Will the eurozone and the common currency survive?
