Tatiana Dementieva
Nouriel Roubini, a famous American economist who predicted the 2008 global crisis, says that the Euro currency will cease to exist within the next 12 months while Europe will fall into the abyss of major recession for a long time. His opinion is shared by many experts around the globe. They say the eurozone is nearing a doomsday.
Are there real reasons to panic? Market leader and will try to answer this question.
Eurozone Breakup Ahead?
While the representatives of the Euro Group (European finance ministers) accept the Euro Commission’s offer to create a common banking authority despite Germany’s opposition, skeptics doubt that the regulator will be of any help to the eurozone. The union’s future is uncertain. The debt crisis is still underway while there is no efficient solution to the problem. The eurozone rate of inflation has grown up to 2.7%.
There is still no unity over the ways and means of overcoming the eurozone crisis, which only deteriorates the situation. The forecasts are getting gloomier. Endless meetings and talks have been inefficient so far.
Not so long ago, Germany resisted the decision to start the European Stabilization Mechanism – a €500bn fund.
Now Germany resists the intension to create a banking regulator, which is promoted by the UK, Poland and Belgium. Formally, Germany explains its opposition by saying that such a watchdog won’t have enough resources to be able to supervise all European banks. In reality, Germany doesn’t want to lose its leadership in Europe. To approve the creation of a common banking watchdog is to hand all the regulating functions to it (now they unofficially belong to Germany).
However, there are analysts who do not agree with pessimistic forecasts. In particular, earlier this year, pessimists said that Greece would leave the eurozone in 2012. Obviously, the economic and financial situation hasn’t improved since then. However, Greece will hardly quit the union within the next 3 months. They say the negative forecasts may be deliberately exaggerated. However, there is still high probability that Greece and some other weak eurozone economies will have to leave the currency union in 2013. A year-long delay won’t change anything in essence.
The Greek authorities are working on plan B in case the country will have to go back to the Drachma.
Nouriel Roubini still thinks that Greece and Portugal will quit the eurozone. Italy and Spain may follow them in case they fail to restructure their debts.
According to Eugene Olkhovsky, ’s leading expert from Canada, all the forecasts concerning the destiny of the eurozone may be divided into 3 groups:
· Negative. In the near future (2013), several southern debt-ridden countries will have to leave the eurozone. The risk of an uncontrolled default in Greece is and will be too high eve if the Greeks eventually manage to compromise with the lenders. The withdrawal of Greece alone may seriously hinder the region’s economy through cutting its external trade and GDP. Moreover, German banks are losing their liquidity. A range of donating countries like Finland say they are not going to save the risky eurozone economies.
· Partially negative. Greece will definitely leave the eurozone. The membership of other risky eurozone economies is questionable. However, the eurozone won’t disintegrate. Having got rid of the weakest links of the chain, the renewed eurozone, including the core (Germany, France) and the Scandinavian periphery, will tighten the integration, which will eventually allow them to overcome the crisis.
· Positive. The eurozone crisis will be solved through tighter integration and the creation of a tax union along with the existing currency union. Technically, overcoming the crisis is no more difficult than the Irish crisis in 2010. In order to accomplish the task, the eurozone should create a counterbalance to the German-French duet - Netherlands, Belgium, Sweden and maybe Poland.
It should be noted, that even optimists say that the Euro currency will see further depreciation. The recent strengthening is a short-term one.
Experts name different consequences of the possible eurozone breakup. Firstly, some of them say that if the risky eurozone economies go back to their national currencies, the latter will see major devaluation (up to 50%). Devaluation may support export. However, this positive aspect will be reduced to nothing by catastrophic inflation. Stronger eurozone economies will also see their currencies losing a bit of their value.
Moreover, German and French banks alone are the holders of risky European bonds estimated at some €600 bn. Therefore, we may see an overall economic decline throughout the region.
However, for some reason, some experts say that a eurozone breakup (if any) will affect few countries. The experts of Market Leader and do not share this point of view. It is obvious that even minor volatility growth in the currency market may have a negative impact, not to mention other factors.
Nevertheless, all the experts are sure that the weakening of the Euro or a eurozone breakup will strengthen the US Dollar. Obviously, those who now prefer the common currency will have to switch to the US Dollar if the worst-case scenario manifests itself.
At this point, it is difficult to say what awaits the eurozone. However, it is clear that the eurozone is about to see major changes anyway. If European leaders eventually manage to preserve the integrity of the currency union, it will be restructured and reformed. Therefore, investing in Europe and its currency is too risky at this point.
Tatiana Dementieva
