Falling out of the euro zone?
The periphery economies of the euro zone are suddenly in the spotlight. Credit rating agency Standard & Poor’s has cut its outlook on Ireland’s sovereign debt to negative. It worries that fiscal measures to recapitalise banks and boost the economy might not improve competitiveness, diversity and growth — all making it harder to manage debt.
Next came Greece. S&P basically put the country on watch with a negative bias. The global financial crisis has increased the risk of a difficult and long-lasting struggle to keep the Greek economy on track, it said.
All this is a long, long way from the unravelling of the euro zone — it just got a new member, Slovakia, after all. But the subject has been raised. Gary Dugan, chief investment officer of Merrill Lynch’s wealth management arm, told a group of reporters in London recently that he expected political calls to quit the currency to be heard in some member countries as the global recession bites. He added that it wouldn’t happen, but that the talk could weaken the euro.
The Centre for European Reform, meanwhile, says the idea of ructions in the euro zone should not be dismissed out of hand.
— The current economic crisis threatens to exacerbate the tensions within the euro zone. There is a serious risk that the growth prospects of struggling euro zone economies will be handicapped for many years by their inflexibility and the external surpluses of other euro zone member states. If so, investors will lose confidence in the credit-worthiness of governments and firms in these countries, leading to a dramatic increase in their borrowing costs –
It cites various options for the euro zone to deal with this. The ‘nuclear option’ would be for insovent countries to default and leave.
Fanciful or the next big crisis?