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Saturday, 7 May 2011

The Fragile Eurozone...

Eurozone growing ever more fragile...

THE EU united last night in its denials of reports that Greece was preparing to leave the eurozone. These ranged from the EU Commission to the German government to the Greek finance ministry itself. Other governments across the 17-member currency union were also prepared to dismiss the report.

Yet the mere hint of such a move was enough to push the single currency down almost 1.5pc -- its biggest drop against the dollar in a year. The report, carried in the German magazine 'Der Spiegel', suggested the Greeks were looking to leave the euro because their debts had become unsustainable.

The fact that a leading and reputable German news magazine could suggest such an eventuality simply highlights just how fragile the eurozone has become. It also highlights just how inadequate the European response has been to this economic crisis which began in January 2010. The European approach has been to place a sticking plaster over the problem -- and heavily indebted countries have simply been asked to pile up even more debt.

While Angela Merkel and Nicolas Sarkozy have ruled out -- at least for now -- allowing countries to default on their debts, the markets have refused to stop talking about it, and many observers believe this is where Greece is heading.

Technically a default can be carried out in the eurozone or outside it. Either way the departure of a single country from the eurozone would be likely to cause serious economic disruption across the continent, including here. On the plus side, it would allow Ireland to make itself more competitive by the country going back to the old Irish punt, which would be far less valuable than other European currencies and that would boost our exports.

But this apparent positive is hugely outweighed by a range of negatives. These include what would happen to all the debts Ireland's banks owe other lending institutions and the ECB. They are priced in euros and if Ireland reverted to the Irish punt, paying off this debt would be even harder than before. There is the long-term question of how would Ireland access the European market if is was no longer part of the bigger club, particularly if that club included giant economies such as German and France.

How this latest twist in a crisis is handled will be crucial to avoid a potential feeding frenzy on the markets and to show the stewardship Europe needs to secure its future.



Report - Irish Independent

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