3 Possible Endings to the Euro Zone Crisis

Ending #1: Greece defaults and exits euro zone

Why it could happen?

The concept of a unified currency for a multi-state region is proving to be very problematic. Because of the varied growth rates and the different needs of each member nation, it is very difficult to come up with a monetary policy that is able to accommodate everyone.

For example, while Germany needs a tighter monetary policy (e.g. higher interest rates), debt-ridden nations like Greece and Ireland want something more accommodative.

It is true that the costs of a breakup far outweigh the benefits for now, but it doesn’t mean that it isn’t a possibility. Reforms and bailouts can only do so much, and if nations like Greece and Ireland are unable to resolve their debt issues, then we could see them forcibly kicked out.

What would be its effects?

Farewell GreeceA wide-reaching debt contagion. Duhn, duhn, duhn, duhn!

Given the large exposure of other euro zone members to Greek debt, we could see a domino effect. Those exposed to Greek debt, namely Portugal, Ireland, Italy, and Spain, will be the next targets, and for them to survive, they will have to find ways to boost growth. Unfortunately, their exposure will be far too big already, and they will be “too big to save”. Devaluation and inflation will hit them, and one by one, they will have to default and exit too.

Ending #2: Euro zone barely survives

Why it could happen?

Of course, there’s always a chance that the euro zone will emerge from all this alive but gasping for air. Think of it like surviving a zombie apocalypse with one eye and a missing arm!

European leaders have been doing all they can to sort out its financial mess, but we haven’t seen many permanent, long-term reforms yet. They’ve been criticized for creating case-to-case band-aid solutions instead of enforcing concrete, preemptive changes. If they keep this up, they may be able to survive, alright. But don’t expect them to do it with flying colors.

What would be its effects?

If the European Union (EU) treats its fiscal woes as a mere liquidity problem, they may not be able to address other issues at hand, and European countries may never regain credibility and their competitiveness.

Doing this is basically like delaying the inevitable. The euro zone would once again face the possibility of breaking down when the European Financial Stability Fund (EFSF) expires in 2013. The current problems may be kept in check, but governance and national weaknesses will remain and can worsen down the line.

Depending on how the global economy performs, many euro zone countries may actually be able to recover and adjust appropriately. But another possible outcome is a Greek debt-restructuring. Greece is expected to have the weakest GDP growth among the euro zone nations over the coming years. And without the safety net that the EFSF provides, uncertainty may easily return and Greece could be forced to restructure its debts.

Ending #3: Euro zone makes it and becomes stronger than ever

Saving the best for last, the third possibility for the euro zone is that it emerges from this crisis stronger! Awww, ain’t that just the happy ending that everyone wants?

Why it could happen?

Despite the not-so-graceful rescue missions that we’ve seen from the EU, we also have to acknowledge the fact that leaders have been stretching their limbs out to keep the union together. Heck, with the survival of their economies on the line, they should be!

Ironically enough, I think that by recognizing that an EZ-break up is indeed possible, finance ministers have taken the first move into further integration. Now the next step for euro zone members is to move past their sovereignty issues and establish a more unified front.

What would be its effects?

For this to happen, some of the more well-off members have to entrust some of their power to the European Union. Eh, this is much easier said than done given that hotshot Germany hasn’t been the biggest eager beaver of the EU clique when it comes to bailouts.

But let’s say that everyone set aside their differences and the euro zone becomes one big happy family. I think that the European Monetary Fund (EMF) can transform into the permanent fiscal-coordinating body that will oversee the balance sheet of the entire region.

A deeper integration will call for fiscal guidelines to be loose enough to allow easy liquidity but strict enough so as not to encourage nations to keep on borrowing. In doing so, the euro zone will become more credible than ever!

  • golddigger

    why is the debt problem in europe a problem ? the relative debt of japan / usa are much bigger?

    some thoughts?

  • Buckscoder

    golddigger,

    in my opinion neither the US nor the EU will come out of their debt problems with a shiny new economy. Sooner or later they both have to pay for what they consumed in the past. I don’t talk about a crash; I talk about slowly devalueing currencies via inflation.

    However, the added, packed problems of the EU are a little worse. They have a common currency, but no common political system. That’s the key problem there! Either they have to tighten the political frame or the euro will fail sooner than later. Problem is just that the people don’t trust the political system of the EU.

    In the US I expect it will also inflate, but it takes a little longer. The US has the advantage of a political unified system!

  • golddigger

    why is the debt problem in europe a problem ? the relative debt of japan / usa are much bigger?

    some thoughts?

  • Buckscoder

    golddigger,

    in my opinion neither the US nor the EU will come out of their debt problems with a shiny new economy. Sooner or later they both have to pay for what they consumed in the past. I don’t talk about a crash; I talk about slowly devalueing currencies via inflation.

    However, the added, packed problems of the EU are a little worse. They have a common currency, but no common political system. That’s the key problem there! Either they have to tighten the political frame or the euro will fail sooner than later. Problem is just that the people don’t trust the political system of the EU.

    In the US I expect it will also inflate, but it takes a little longer. The US has the advantage of a political unified system!

  • golddigger

    I agree on most of your posting, but eu economy looks so much more stable and the houses are built from stone and not from plywood , personal debt is low and people are skilled.

    usa has only a ”real” working culture besides that there mostly fat or unhealthy , in debt and wasting resources like energy

  • golddigger

    not sure if you can call energy a resource but you know what i mean.

  • golddigger

    I agree on most of your posting, but eu economy looks so much more stable and the houses are built from stone and not from plywood , personal debt is low and people are skilled.

    usa has only a ”real” working culture besides that there mostly fat or unhealthy , in debt and wasting resources like energy

  • golddigger

    not sure if you can call energy a resource but you know what i mean.

  • hedgehog

    Japan’s debt is mostly internal, not external debt as in the case of EU and US. Therefore their sovereignty is intact. In layman’s terms, Japan owes mum and dad whereas US and EU and most other developed countries owes the bank. And banks can foreclose on you and make you a bankrupt. Mum and dad just smacks you on the head.

    To me, US is just digging one hole to cover another, so we’d have to see how long this is going to go on for.

  • hedgehog

    Japan’s debt is mostly internal, not external debt as in the case of EU and US. Therefore their sovereignty is intact. In layman’s terms, Japan owes mum and dad whereas US and EU and most other developed countries owes the bank. And banks can foreclose on you and make you a bankrupt. Mum and dad just smacks you on the head.

    To me, US is just digging one hole to cover another, so we’d have to see how long this is going to go on for.