Euro Survive

Executive Summary

Over the past two years the Eurozone has grappled with a sovereign debt crisis that threatens economic stability in Europe and beyond. The Eurozone has been swept up in turmoil that has ranged from stock and bond markets to exchange rates, government spending, and tax rates.

In 2002, when euro notes and coins entered circulation, the dominant view among the 15 (now 23) member states using the currency was that it represented a big step toward ensuring peace and prosperity for the Continent. Due to a serious and worsening European debt crisis, the euro this year is likely to face the greatest challenges to its survival. MOST people are assuming that, in the end, European leaders will do whatever it takes to save the single currency. That is because the consequences of the euro's destruction are so catastrophic that no sensible policymaker could stand by and let it happen.

Should or should not the Euro survive is a question. It can be viewed from both sides. For a central currency to work, it needs central control, and Europe doesn't have this. On the other hand, the Euro should be survived because of the consequences of the Euro break-up. The cost for any one country leaving and the knock-on effects on other countries would be so great. The Euro should be survived which is both a political and financial imperative as the costs of dismantling it would be severe and the process to do so entirely unpredictable.

It is possible that some participated countries leave the EMU. Regarding the Euro, there are mainly three pitfalls, which could be considered as solutions for the future if the Euro hopes to survive for long term and prevent more participating countries' leaving.

In conclusion, it is becoming increasingly unlikely that the euro-club will survive in its current form. Even if officials do not want to abandon the euro, they may come to do so as a result of a strategy of trying to get other countries to agree to a policy change. A country that believes that monetary or fiscal policy is too tight may threaten to leave if policy is not changed.

1. Overview of Eurozone Crisis

Over the past two years the Eurozone has grappled with a sovereign debt crisis that threatens economic stability in Europe and beyond. The Eurozone has been swept up in turmoil that has ranged from stock and bond markets to exchange rates, government spending, and tax rates.

There are imbalances of debt exposure between borrowers in one country and banks in another. For example, French borrowers owe Italian banks $50.6 billion; Italian borrowers owe French banks $416.4 billion. It shows that the imbalance is France's banking system more exposed to Italian debtors by about $365.8 billion. Greece amassed a huge debt that it has scant hope of repaying. A chaotic Greek default could hurt all European banks and pension funds that have extended Greece credit and cause a wider bank panic. A financial firewall might halt contagion by backstopping the credit of four other shaky nations -- Ireland, Portugal, Spain and Italy. If there is no firewall or if it is inadequate, it would be easy to imagine a run on banks. The euro zone's single currency makes it easy to shift money across borders from risky economies to safer ones. That and the lack of central banks in each country -- those went away in 1999 with the arrival of the euro -- make the euro zone "the ultimate contagion machine," says Kenneth Rogoff, a Harvard economist. If no preventative measures are taken, a chain of events like this could unfold: In reaction to a Greek collapse, investors become worried about their exposure to other risks in the region. Borrowing costs rise for Ireland, Italy, Portugal and Spain, adding to their debt loads. Italy may not be able to protect its banks if there is a loss of confidence. French banks, burdened with all manner of Italian debt, could totter. Money could flee to safer countries like Germany in a matter of hours. Losses could extend to American banks, which have large exposures to debt in France and Italy. On top of this, American exports to the European Union -- collectively the biggest American trading partner -- could suffer if the crisis slows European growth and causes the euro to depreciate against the dollar. Exposure to French banks could lead to other losses beyond the Continent.

The crisis has tested the solidarity of European Union (EU) member states and strained the capacity of EU leadership and institutional structures. Many analysts consider the Eurozone crisis to be the biggest threat to the global economy. This challenge facing Europe could be a historical turning point.

2. Survival of the Euro

In 2002, when euro notes and coins entered circulation, the dominant view among the 15 (now 23) member states using the currency was that it represented a big step toward ensuring peace and prosperity for the Continent. What people in individual European countries tended to overlook was that a single currency brings greater interference by members of the union in each state's monetary, fiscal and political affairs. Tension over such intrusions, coming to the fore in the wake of sovereign debt crises in Greece, Ireland and elsewhere, casts serious doubt on the survival of the euro as the single currency for most of Europe.

2.1 Will the Euro survive?

Due to a serious and worsening European debt crisis, the euro this year is likely to face the greatest challenges to its survival since the inception of the unified currency a decade ago. The Eurozone's collective decision to offer massive support to Greece in 2010 was merely a prelude to what lies ahead -- with no fewer than six states (Greece, Ireland, Spain, Portugal, Italy and Belgium) now deemed at risk of defaulting on their obligations and thus probably needing new infusions of Eurozone assistance. So will the Euro survive? Yes, but I don't think it will remain its current form.

MOST people are assuming that, in the end, European leaders will do whatever it takes to save the single currency. That is because the consequences of the euro's destruction are so catastrophic that no sensible policymaker could stand by and let it happen.

If there is no more help from affluent countries within the European Union, Greece probably have really no chance to recover, while the euro is also facing collapse. But because the German bank is the Greeks' creditors and therefore the Greek sovereign debt defaults is still the largest in Germany, so Germany will help Greece. Apart from Greece, other than the euro-zone countries, Spain, Portugal and Italy have similar financial problems, if not resolved soon as the debt crisis, in Greece,