2011 is dedicated to the eurozone’s fortitude. Despite the surmounting pessimism surrounding the fate of the 17-nation area and a prediction from Credit Suisse’s Fixed Income Research team last month that “we seem to have entered the last days of the euro”, the eurozone is showing signs of a long term makeover more so than signs of impending failure.
Avi Tiomkin of Forbes Magazine quoted in a 2008 article, “It is only a matter of time, probably less than three years, until the euro experiment meets its end…Tensions between inflation-obsessed Germany and growth-hungry Latin countries will spell its end.” As rising inflation continued to plague the eurozone in 2008, comparable to today’s eurozone environment, Avi Tiomkin’s argument was that the “Latin” countries’ (France, Italy, and Spain) thirst for growth ran counter to their more inflation-wary counterparts in the German bloc (Austria, Luxembourg, the Netherlands). Although he makes a valid point for the demise of the euro, he ignores the fact that the much stronger German bloc has both the most to gain if the Euro survives and lose if the Euro fails. For example, Germany’s competitiveness and balance of payments have far outpaced those of its eurozone counterparts since the introduction of the Euro than if it were to have a stand-alone currency.
Talks of a eurozone bailout from other countries and the ECB, earlier this year, have since dissipated significantly due to the potential moral hazard and increased inflation risk they pose, respectively. Unlike the 1997 Asian “capital account” Crisis, global financial contagion, in the event of a eurozone member default, is more of a threat in the current European Debt Crisis due to the highly intertwined and indebted Western financial system. Raising capital via the debt markets has been and continues to be a challenge for eurozone members due to the likely exploitation of the Crisis by bond speculators. 2012 is no doubt crucial for the future of the eurozone, and as the ECB continues to lend cheaply to eurozone banks, risk exposure will only increase; however, default by a member state is no longer a viable option.
At the end of the crisis, many expect the complete dismantling of the monetary union, but I think a slimmer eurozone is more realistic with Portugal and Greece being the first victims. However, before this process can begin, borrowing costs must decrease as recently experienced during Italian bond auctions.
