Make Or Break For The Euro – What Is It Really?

Is the Euro headed for a breakup or can the Euro zone salvage the single currency trading symbol from cracking up by making necessary political and financial compromises? The process is not going to be painless, but could lead to economic sacrifices in the short run and hardship for some nations in the least. Starting with the Greek debt crisis, which further spread to Italy, the European debt crisis seems to be taking its political toll as the people of the Euro zone nations seem to believe that the political leaders, in whom they laid their trust, have backstabbed them and led their nations into an economic crisis. With the Greek Prime Minister having given up his position, and the crisis spreading to Italy, the Italian Prime Minister has also been toppled over. Both nations seem to want to appoint savvy technocrats as their new leaders to steer them out of the economic mess left over from years of economic-misrule of the two leaders. Greece has chosen Lucas Papademos, a former vice-president of the European Central Bank as their new leader, while Italy is placing its bet on former European commissioner Mario Monti as its new leader.

Europe needs to make political compromises that allow the underlying economies forex industry to function closer and become more alike or it would have to let the Euro sink and revert to individual currencies. Effectively, to make the Euro survive, members of the Euro zone nations will need to give up on independence of how they spend their taxes and vest the authority to a centralized authority. The individual debt of the Euro zone nations may need to be collectivized and greater authority for monetary management may need to be vested with the European central Bank. In essence, it appears that from a monetary union, the Euro zone will need to move closer towards a political union, with some key governmental functions including monetary and fiscal policies getting more centralized.

The irony of the matter is that some nations, which are actually the worst hit, may want to break out of the Euro as that will help the new currency to depreciate, which in turn will enable export led growth and recovery. Greece may actually be interested in reverting to a devalued Drachma so that the nation can get into an export led recovery. However, this is no easy task and nor is it painless. The value of foreign debt would soar in terms of a new devalued domestic currency and enhance the debt burden manifold. Moreover, a breakup of the Euro could bring trade in the region and with the rest of the world to a standstill for some time until the new currencies find their new levels. This could lead to billions of dollars of losses and add to the economic slowdown already plaguing the Euro zone and other major nations of the world.

Thus, it appears that while different Euro zone nations will have different priorities and would want to push their own agendas, the Euro zone will finally need to draw out a compromise so that the single currency could continue and the breakup costs and consequences could be avoided.