One question I get asked a lot at the moment by my clients is ‘will the Euro will survive?’ closely followed by ‘when will Greece leave the euro?’ Both are difficult to answer in a sentence, but If i had to I’d say ‘yes in the short term’ and it ‘won’t’, I’ll explain my reasoning now!
I fell that the euro will survive in the short term because European leaders have too much invested in the single currency, to allow it to fail. I do however feel that the only way the euro will survive is through the formation and wide spread use of a Euro bond. This would basically mean that rather than each country issuing bonds and therefore owing debt individually, a Euro bond would be issued by the entire EU. This will reduce the cost of borrowing for peripheral countries and therefore alleviate the debt and budget deficit pressures on these countries.
Another idea widely floated is the need for fiscal transfers. The example cited is the US , where richer states pay for poorer states deficits. In theory, this is happening already through loans and bailouts for Greece, Ireland and Portugal. However the fiscal transfer is not a loan and would not be repaid. Personally I can’t see this happening as I think national differences in culture, work ethic, and outlook on life is too varied for one country to be happy to pay another countries debts. For example, could you see French Tax payers happily funding Irish health care? It seems unlikely to me.
Therefore in the short term I see the Euro Bond as the most viable option, but longer term I feel that some of the peripheral countries may have to leave the euro in order to manage their own monetary policy and primarily to devalue their own currency if required.
Many clients also ask what this will mean for their currency requirements, if the euro does break up in any way. Ultimately it will really depend on how the break up occurred. But as this is unlike in the short term (in my option) I’d expect to see the Euro continue to remain reasonably strong over the coming months as investors will not be scared away from the single currency in my opinion.
To see views of some leading economists and analyst have a look at the following article on the BBC. http://www.bbc.co.uk/news/business-13872847 I found it quite interesting.