Even though news about the euro seems to get worse day by day, most observers believe Europe’s leaders will do whatever it takes to save the single currency. This is because the break-up of the eurozone will have very severe economic and political consequences not only in Europe but also globally.
Global companies are preparing contingency plans for a possible break-up of the eurozone and I know that some large Maltese companies, including the banks, are doing the same- Anthony Manduca
This is what the Organisation for Economic Co-Operation and Development recently said about the consequences of a disorderly break-up of the eurozone:
“If everything came to a head, with governments and banking systems under extreme pressure in some or all of the vulnerable countries, the political fallout would be dramatic and pressures for euro area exit could be intense.
“The establishment and likely large exchange rate changes of the new national currencies could imply large losses for debt and asset holders, including banks that could become insolvent.
“Such turbulence in Europe, with the massive wealth destruction, bankruptcies and a collapse in confidence in European integration and cooperation, would most likely result in a deep depression in both the exiting and remaining euro area countries as well as in the world economy.”
A number of international media reports have, in fact, already pointed out that global companies are preparing contingency plans for a possible break-up of the eurozone, and I know that some large Maltese companies, including the banks, are doing the same.
Although I believe that in the end, Europe will not let the eurozone collapse, time is clearly running out, and last Wednesday European Monetary Affairs Commissioner Olli Rehn said the EU had just days to take action to resolve the crisis. He said: “We are now entering the critical period of 10 days to complete and conclude the crisis response”.
Last week eurozone ministers took a few small steps in response to the crisis and agreed to measures to expand the bloc’s bailout fund and to release €8 billion in bailout money to Greece. Furthermore, hints by European Central Bank president Mario Draghi that the ECB could adopt a more aggressive response to the bloc’s debt crisis has been largely welcomed.
However, this week’s EU summit scheduled for Thursday and Friday is now seen as absolutely crucial as European leaders examine proposals on eurozone economic integration, new rules for national budgets and strict sanctions to ensure enforcement, among others.
Although I might be somewhat over-optimistic about the EU’s determination to reach an agreement over the eurozone, keynote speeches given by French President Nicolas Sarkozy and German Chancellor Angela Merkel last Thursday and Friday indicate that such a deal is indeed possible.
President Sarkozy said France and Germany will announce proposals tomorrow to “guarantee the future of Europe” and that both countries agreed there should be a new EU treaty to impose greater financial integration.
He said: “We must confront those who doubt the stability of the euro and speculate on its break-up with total solidarity.”
The French President made it clear that eurozone countries must be subject to tougher control by Brussels over their national budgets, with the possibility of more severe sanctions for those who exceed the Maastricht criteria – even though member states should continue to control key strategic and political decision-making in the EU.
Sarkozy repeated his call for eurozone members to insert a “golden rule” in their constitution to force governments to balance their budgets, something he has not yet managed to get approved by the French Parliament.
He also said the euro could not continue to exist unless eurozone economies acted together, with France and Germany playing a key role to ensure “a zone of stability”.
In her address to the German Bundestag last Friday Chancellor Merkel said Europe was working towards setting up a “fiscal union” in an effort to resolve the eurozone’s debt crisis. She said a new EU treaty was needed to create such a union and impose financial discipline.
Merkel pledged concrete steps towards a fiscal union, saying the eurozone needed budget discipline and an effective crisis management mechanism, which is why treaty change was necessary.
In her speech Merkel also reiterated her opposition to the ECB issuing ‘eurobonds’ backed by all eurozone members. “A joint liability for others’ debts is not acceptable,” she said. “Eurobonds are not a rescue measure in this crisis.”
Eurobonds is the idea of a common, jointly-guaranteed bond of eurozone governments. It has been suggested as a solution to the eurozone debt crisis as it would prevent markets from differentiating between the creditworthiness of different government borrowers.
However, many in Germany believe eurobonds would punish countries with a high credit rating and reduce the incentive of other governments with a high debt rate to reform.
Other key developments before this week’s summit include the expected approval tomorrow by Italian Prime Minister Mario Monti’s Cabinet of deficit-cutting measures and reforms to promote economic growth, and the Greek Parliament’s likely endorsement on Wednesday of a packet of austerity measures.
Both approvals would send out positive signals to the markets ahead of the EU’s crucial summit.
It is important to note that a new EU treaty would have to be approved by all 27 EU members – 10 of which do not use the single currency, and it would be interesting to see whether Britain will demand any concessions from the EU – such as returning some powers to Westminster – in return for treaty change.
However, even though some Conservative backbenchers will probably be demanding such concessions, Prime Minister David Cameron – who governs in coalition with the pro-Europe Liberal Democrats – realises that a quick end to this eurozone crisis is in everyone’s interest, including Britain’s.