Can the Eurozone actually survive?

Category: ECB-European Central Bank | Eurozone | Greece
August 20, 2012 | Comments Off |
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Eurozone

Can the Eurozone actually survive?

Does the Entire Eurozone actually want the Euro to survive? With growing Differences & also the In-differences, a gradual process of disintegration eventually makes a Eurozone breakup unavoidable. A Eurozone breakup may only be postponed & not avoided completely given the current conditions of being for & against the Eurozone Bonds Buying support & resentment. If the inevitable breakup is concluded as Un-avoidable & the only viable, logical solution of a way-out, a delay would in fact worsen the situation much more & the cost will most likely be in trillions of euros. A breakup at any point will be a costly & a painful affair, but will be a lot dearer after wasting additional trillions of Euros in a fresh round of official financing further on. Only if the Political Circles in the European Union realize this in time…. A Crushing Credit-Crunch, Rising Inflation, high oil prices undermine prospects of a timely recovery.

Even with rising political constraints in Germany, the ECB now plans to provide another round of large-scale financing to Spain and Italy with more bond purchases. European and global markets have had a recent strong run on hopes that a new plan being drawn up by the ECB, the central bank overseeing the 17 countries that use the Euro, could help the Eurozone tackle its problems. Investor appetite for Spanish, Italian and other peripheral debt also picked up, at the expense of German bonds. Germany’s der Spiegel magazine said over the weekend that the ECB’s new bond buying plan, due to be detailed at the start of September, could see the bank setting upper limits on bond spreads, above which it would start buying. Italian and Spanish bonds rose after the Spiegel report. The yield on Spain’s 10-year government bond fell 14 basis points to 6.27%, while the yield on Italian 10-year bonds was 5.73%, down 4 basis points.

However, policymakers remain in the early stages of thrashing out the details of any plan, reported Reuters. With many European policymakers on summer holidays, investors have had a respite from negative headlines. This week’s focus is on a meeting between leaders of Greece and Germany on Friday as well as details of Spain’s ‘bad bank’ plans, due to be announced on the same day. French President Francois Hollande and German Chancellor Angela Merkel will meet in Berlin on Aug. 23. Greek Prime Minister Antonis Samaras travels to the German capital the next day before going on to Paris on Aug. 25. Rumors are, Greece is expected to stage a disorderly Eurozone exit in the next few months.

The talks come as the ECB fleshes out plans to curb the turmoil in European bond markets, a move that would give governments time to push through measures to revamp their economies.  ECB President Mario Draghi is trying to overcome opposition from Germany’s Bundesbank to a new bond-purchase plan. Announced on Aug. 2, Draghi said any ECB bond-buying would work alongside euro-area bailout funds and only if countries applied for support and accepted strict conditions in return. Italy and Spain, the countries now at the heart of the crisis as borrowing costs soar, have yet to say whether they will request ECB help. German Finance Minister Wolfgang Schaeuble said Aug. 18 that the sovereign-debt crisis mustn’t become a “bottomless pit” for his country. “There are limits,” he said, ruling out another aid program for Greece. At the same time, two German lawmakers said last week that Merkel is considering easing Greece’s bailout terms, as reported by Bloomberg.

Eurozone crisis worsening amid Global slowdown:

Fiscal and sovereign-debt strains are becoming worse as interest-rate spreads for Spain and Italy have returned to their unsustainable peak levels. Indeed, the Eurozone may require not just an international bailout of banks (as recently in Spain), but also a full sovereign bailout at a time when Eurozone and international firewalls are insufficient to the task of backstopping both Spain and Italy. As a result, disorderly breakup of the Eurozone remains possible. US economic performance is weakening, with first-quarter growth a miserly 1.9% – well below potential. Job creation faltered in April and May, so the US may reach stall speed by year end. The risk of a double-dip recession next year is rising with a looming US fiscal cliff. China has been witnessing a gradual slowdown of its economy though official data numbers cannot be heavily relied upon. The economic slowdown in the US, the Eurozone, and China already implies a massive drag on growth in other emerging markets, owing to their trade and financial links with the US and the European Union. Eurozone Economies Darken….

Can large-scale financing with painful adjustments restore Eurozone?

The fiscal and banking union elements may be important to the restoration of the Eurozone. But the starkly naked question is, whether large-scale financing and gradual adjustments can restore Eurozone’s “Sustainable Growth” in time. Only if Italy and Spain are illiquid but solvent, and large-scale financing provides enough time for austerity (which seems difficult at this point in time), and economic reforms to restore debt sustainability, competitiveness, and growth, the current strategy will work and the Eurozone may survive. In the meanwhile, ESM or some form of fiscal and banking union may also emerge, together with some progress on political integration.  The supporting Banks & nations may have to maintain continued large-scale financing with tons of patience to avoid a bailout fatigue. Medicine not given on time is “NO Medicine Given”. As for the Debt ridden nations, earlier engaged lavishness & arrogance has to be paid for, one day or the other & no amount of life support system will help the recovery without Self-correction & restraint. The periphery nations currently with unsustainable debt burdens will have to avoid a social and political backlash against years of painful contraction and loss of welfare to avoid an austerity fatigue. Also the risk of massive losses incurred on the back of massive and large-scale financing for Germany or the ECB might jeopardize the core Eurozone economies’ debt sustainability, placing the survival of the European Union itself in question. Despite the huge risk, Euro nations and the ECB are relying on large-scale liquidity to buy time to allow the adjustments necessary to restore growth and debt sustainability. Germany seems fixated on the credit risk to which its taxpayers would be exposed with greater economic, fiscal, and banking integration. With the kind of political Gridlock being witnessed over the past months, the Eurozone will face serious difficulties in achieving a full fiscal, banking, economic, and political union to overcome the full blown Eurozone Debt Crisis, triggering the question : Does the Entire Eurozone actually want the Euro to survive?. A gradual, timely & a mutually agreed upon Early Breakup would be graceful rather than a split after enduring graver & nastier conditions. ONLY a delay (as expected) in the breakup will prove whether the delay was rightly decided upon or not. To prevent a disorderly outcome & a complete disintegration of the Eurozone, today’s fiscal austerity should be much more gradual, a fiscal union with debt mutualization – Eurobonds, could be implemented & in addition a full banking union along with moves toward a greater political integration must be considered.


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