Four Reasons Why the Euro Will Survive

Everyone has their opinion on the euro crisis, what caused it, and how it should be fixed. Many people including myself have contended that the euro will fall apart within the next year or two, and that things will have to get worse before they get better.

Still, I'm trying to stay open minded and I came across this article in CNN Money today which argues that the euro will live happily ever after.

Does the euro need to collapse before countries like Greece and Portugal can rebuild? Will the euro currency still be standing a year from today? Here are four reasons why some say the euro will live through this crisis:

  1. It's too painful to breakup (even for Germany).
  • The euro zone hasn't been as hard on Germany as everyone else. German unemployment is at its lowest levels in 20 years, and the euro zone has kept Germany's exports cheap and competitive. "If the ship sinks, all on board, including Germany, will sink with it.
  1. Euro area voters are risk averse.
  • Many of the euro zone voters are rich and aging, so they want to avoid risk. No one likes austerity, but "when a euro crash is potentially imminent, voters will likely agree to the pains of austerity rather than risk the uncertainties of breaking away from the euro zone."
  1. The euro is innovative and a work in progress.
  • The euro has the capacity to innovate new institutions, and in the coming years, it could overcome problems that others deem insurmountable."
  1. The European Central Bank can handle the crisis.
  • The ECB is the lender of last resort, and it has plenty of firepower left for faltering economies. Germany fiercely opposes this idea, but going back to point 1, they may eventually cave in their own best interests. "The ECB can buy a lot more time if needed.

I agree with some of these points, but I'm not totally buying it. I think the list gets less convincing as it goes on.

The second point would make sense if we expected voters to behave rationally. In a time of uncertainty and frustration, I wouldn't be surprised to see many people vote for radical change, even if that means bailing out of the euro zone. The next argument, that the euro "has the capacity to innovate new institutions," is just way too vague. The final point makes sense, but I think this article assumes that throwing more money at the problem is going to fix the fundamental problems permanently, when in fact it's more like the ECB is plugging their finger in the dike. All things considered, I'm still betting the euro collapses within the next two years.

So what do you think? Does the euro stand a chance at surviving? In the long run, would the global economy be better off without it?

Comments (9)

 
Jun 7, 2012 - 11:51pm

I disagree with the second "1." that you have have regarding austerity. There is one thing that history can teach tell us about Europeans is that if they want something, they take to the streets to get it. Taking simple cuts is one thing, but to cut employment of government workers by half or more and eliminate practically all forms of government support and spending would not be worth doing just to save the simplicity of using one currency and have the ability to travel without borders. Europeans have lived thousands of years without those luxurious gifts contrivances.

 
Jun 8, 2012 - 1:01am

chabo11:
It's too painful to breakup (even for Germany).

i had a german bish told her we braking up gurl im real sorry, then she say nope...haha no u didnt bish i just ended this, well it got real ugly real fast, ugly like her boney german ass
chabo11:
The euro is innovative and a work in progress.

lol
 
Jun 8, 2012 - 3:20am

chabo11:
The euro is innovative and a work in progress.

lol[/quote]

Yeah, this is kinda weak. When I read that in the article it was pretty poorly explained, and after googling every variation of how the euro has "institutional innovation" made me realize you can just put words like that together without any real meaning.

See my WSO blog
    "The only thing that interferes with my learning is my education." Albert Einstein
 
Jun 8, 2012 - 10:37am

I definitely believe the Euro will survive. Remember, Germany destroyed all their Deutsche Marks when they made the switch (despite arguments to save them, somewhere).

Questions for you:
Do you believe for the Euro to be "successful" that it needs to include economically "weak" European countries like Greece, Italy, Portugal and Spain?

Should the Euro be able to accept then "kick out" members of the monetary union on whim? At what point do countries say, "we've had enough"?

My WSO Blog "Unbelievably Believable" -- RG3
 
Jun 8, 2012 - 7:23pm

21 Lives:
I definitely believe the Euro will survive. Remember, Germany destroyed all their Deutsche Marks when they made the switch (despite arguments to save them, somewhere).
As one of my favorite professors one of my last years said, "highly, highly doubtful that they aren't actually squirreled away somewhere dark and quiet." I find it incredibly unlikely that they just burnt all their old currency without anticipating something like this shitshow happening down the road.

I am permanently behind on PMs, it's not personal.

 
Jun 8, 2012 - 2:07pm

Political paralysis in Greece. May 6 elections failed. Next election is called for June 17. Depending on outcome i wouldn't be surprised if Greece exits on its own. Obviously impossible to assess what will really happen there (i know that i don't know). Judging by the current market environment, the surprise for the markets is that Greece stays in the Euro. Either way both the Fed and the ECB are likely to expand their balance sheets to fight signs of deflation (Bernanke hinted at it yesterday).

Since, Greece is unlikely to stay in EUR, are there risks of contagion? Few reasons, euro-area is lacking key institutions such as fiscal union, it has a common central bank and there is no unified bank guarantor.

So what can happen if there is contagion? Concerns could spread further to Spain and Italy which are much bigger economies than Greece. Once that happens, the next domino to fall would be France which comes under pressure when its borrowing costs increases.

So is the Euro to stay? Maybe, but definitely not in its current form.

If you want the bull case, just keep repeating to yourself: "Greece is not that big" (~200bn EUR GDP).

 
Jun 8, 2012 - 8:45pm

I dunno, they might have saved some of them, but I would think many were destroyed given this passage from Michael Lewis' Boomerang p 321-322 (Ipad).

"Back when the idea of the euro was being bandied about, Nolling had been a governor of the Bundesbank...Just before the deutsche mark got scrapped, Nolling had argued to the Bundesbank that they should just keep all the notes. " I said, 'don't shred it!'"..."I said, 'pile it all up, put it in a room, in case we need it later!'"

Nolling is Wilhelm Nolling, economist.

But then there is this article that says sometime last year Germany was running its printing presses printing deutsche marks. Germany Printing Deutsche Marks

So the Germans are preparing for anything to go wrong.

My WSO Blog "Unbelievably Believable" -- RG3
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