Will the Euro Survive
VICKY PRYCE, Senior Managing Director, Economic Consulting, FTI consulting In 2002, when euro notes and coins entered circulation, the dominant view among the 15 (now 23) member states using the currency was that it represented a big step toward ensuring peace and prosperity for the Continent. What people in individual European countries tended to overlook was that a single currency brings greater interference by members of the union in each state’s monetary, fiscal and political affairs. Tension over such intrusions, coming to the fore in the wake of sovereign debt crises in Greece, Ireland and elsewhere, casts serious doubt on the survival of the euro as the single currency for most of Europe. During the next few years, member states will do whatever they can to avoid a split because the practical inconveniences would be enormous. Weaker countries, such as Greece, would face a radical devaluation of their currency and essentially would have to close their fiscal borders to prevent a flight of money. Stronger nations, such as Germany, would suffer as well. The inevitable rise in a German-dominated currency would make exports — a cornerstone of the German economy — far less competitive on the world market. That’s why leaders of financially robust member nations will continue to support bailouts despite grumbling from their citizens about shouldering the lion’s share of the cost; it’s also why weaker nations, such as Greece and Ireland, will continue to accept austerity measures despite protests from their citizens about cuts in government services. But over the longer term, say, a decade or so, the survival of the euro in its current form will become much more problematic. In order for the bailouts to succeed and the single currency to remain viable, the productivity gap between weaker and stronger countries must close significantly. Yet during the past decade, technological advances and wage moderation have helped Germany widen the...
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