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[Brussels e-briefings] The Eurozone ‘time bomb’: Can the single currency be rescued for good?

28 July 2011

Brussels e-briefings post: Richard Werly
Date: 26 July 2011

Watch the webinar recording!

The following is a digest of the webinar discussions held on Tuesday, 26th July, 2011, with our host Richard Werly.

Will the second rescue plan for Greece bring an end to market speculation?

The Euro as a single currency is here to stay, but it is about to face a time of challenge. The expectations are that the financial markets will continue to be bumpy, especially as the financial vulnerability of Spain, Portugal, and Italy continues to be high.

One can expect a new phase of the Greek rescue plan to come up again next spring. A type of partial restructuring of the Greek debt is foreseen. At the moment, the Eurozone is attempting to avoid any crash, but the measures taken so far are not enough to prevent a hard or difficult landing for Greece.

Will the risk of contagion to other Eurozone countries remain?

Contagion is a concept that has to be specified. We don’t think Italy or Spain will follow the same path as Greece or Portugal. We expect these two important Eurozone economies to continue to finance themselves by borrowing from the financial markets, despite the very high interest rates.

On the other hand, can Portugal avoid the participation of its private creditors to its rescue plan? Yes, but only for the time being. If the Greek partial default proves to be manageable, there is a good chance that this solution will be seen by Germany as the right one. Berlin may again insist on having the banks shoulder a part of the responsibility.

What is the main positive news about the EU rescue plan and the announcements that have been made?

The main positive news is that the Eurozone has understood the need for extraordinary measures to be taken. The sense of urgency, so often denied by European leaders, is definitely present. It is an important step, as a speedy response if often the best way to prevent contagion and instability.

The second positive news is that the EU is now moving at full speed to create a European Monetary Fund, based on the existing EFSF financial stability mechanism, based in Luxembourg.

Is the EU buying time or is it really putting an end to the crisis?

The EU is indeed buying time, which makes sense, as structural reforms in vulnerable countries in the EU cannot be implemented in a matter of weeks. The expectations are that, by next autumn, the first results of the Greek privatisation process will bring some relief to the financial markets, followed by a continued budget deficit reduction in Portugal, Spain, and Italy. To understand this strategy, one has to look at the alternative: it could have been bankruptcy for Greece, but the EU has, from the beginning, refused to consider it so.

Will the Euro crisis linger and affect Europe’s status in the world in 2011?

Europe is weakened by its debt crisis. It is obvious and unavoidable. Europe is also weakened by the differences between its member states regarding the successive rescue plans. We don’t expect 2011 to be a bright year for the EU. The paradox is that, due to debt difficulties in the USA, the EU may be given the benefit of the doubt by emerging economies.

Questions? Post a comment below, or e-mail Richard Werly at richard.werly@letemps.ch

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