The euro’s decline may be closer than the eurozone’s authorities think. Jacques Attali, former chairman of the European Bank for Reconstruction and Development (EBRD), said the euro might not survive beyond Christmas. The Wall Street Journal writes that companies providing software for foreign exchange trading “are testing systems that could handle trading of previously shelved European currencies.”
“The issue now is: will the euro still exist by Christmas? There is more than a one-in-two chance that the single currency will not survive,” the French economist said.
According to Attali, to avoid the euro crash, the European Central Bank must be allowed to purchase debt stricken countries’ bonds and invested with supranational control over spending.
This is not the last of the bad news from the eurozone. The yield of two-year Italian sovereign bonds worth 10 billion euros soared to a record-high 7.814% during Friday’s trading compared to 4.628% for the previous operation. The yield on 10-year bonds has again risen above 7%.
On November 25, Standard & Poor’s downgraded Belgium’s sovereign rating one notch, while Moody’s warned that “the escalation of the sovereign and banking crisis in the eurozone threatens the credit ratings of all EU countries.”
Experts say that this eurozone turmoil is being exacerbated by the European officials’ inconsistent actions and dubious statements, including regarding the Greek debt issue.
“I think the decision to write off 50% of Greek debt was a gross mistake,” Troika Dialog Managing Director Yevgeny Gavrilenkov said. “It made market players wonder whether this is a default.”
This is a critically important question, because in a default all those who bought credit default swaps (CDS) will receive money – usually the face value of the loan, whereas it is unclear who will reimburse the Greek creditors’ losses if this is not a default. The system’s ability to protect against such risks has been put in question, which is why investors are avoiding risky bonds of the distressed European countries.
Gavrilenkov said that the ambiguous Greek debt issue was one reason for the surge in Italian bond rates.
Prudent countries trapped
Almost everyone seems to have criticized Europe’s economic authorities for inflexibility and failure to provide a prompt response to the crisis, which points to deep-seated economic contradictions in the eurozone.
The tools that can be used to help Greece, Italy, Portugal and several other economies will inevitably deal a heavy blow to eurozone leaders Germany and France, and all other countries that operated broadly within their means or reined in excessive spending.
Purchasing this debt through an additional money issue, as Attali advocates, would depreciate the euro and spur inflation, hitting the general public across the EU’s leading economies, said Yelena Matrosova, director of the BDO Group’s Macroeconomic Research Center in Russia.
“German consultants and experts say they find this unacceptable, meaning that there is no solution to this problem,” Matrosova said. Market players are aware of this dilemma and are therefore not optimistic.
Sacrifice the weak
The situation may be dramatic but the euro might still survive, some experts believe. The single currency will make it to Christmas, if only because there is no mechanism for European countries to return to their former national currencies.
“I don’t think they will agree to drop the euro within three weeks, because it entails a mass of technicalities which simply cannot be resolved in such a short time,” Gavrilenkov said.
But there are more serious reasons to save the euro. Yelena Matrosova believes that the eurozone is the Old World’s only chance to resist the rising economies of China, India and Brazil.
“Scale is important, as even Germany, a major power, cannot single-handedly fend off other large economies. It stands to lose its competitive advantages,” Matrosova said. This is why the Germans will have to agree to purchase the defaulted Greek, Italian and other debts and subsequently suffer the consequences in the form of inflation.
“Sooner or later, the leaders of the EU’s largest economies – France and Germany – will agree on measures to strengthen the currency union,” said Yury Danilov, director of the Stock Market Development Center foundation.
This does not mean the eurozone will stay the same. “One or even several countries may withdraw from it, but this does not mean the European currency union cannot be preserved or even strengthened,” Danilov emphasized.
The views expressed in this article are the author's and may not necessarily represent those of RIA Novosti.