European finance officials continued their debate this week over details of a fresh aid package for Greece. Wednesday, Moody’s added insult to injury, downgrading Greece’s credit rating from B1 to Caa1 (the equivalent of moving it from “really bad” to “really really bad.”) In downgrading Greece (again), Moody’s cited the unsurprising rationale of an increased risk that Greece would fail to stabilize its debt position without debt restructuring and continued weak economic growth. Thursday, thousands of Greeks took to the streets in Athens to protest austerity measures (like the elimination of government-provided free dental braces for children), clashing with police and shuttering most public services. As the great Yankee catcher Yogi Berra once said, “It’s like déjü vu all over again.”
Along those same yogic lines was renewed talk of potential euro dissolution, with member nations reverting to their legacy currencies. Some even argue a euro dissolution would be positive. And there could be some seemingly appealing reasons for euro dissolution, like permitting weaker countries (a la Greece) to devalue their currency and/or control monetary policy (though neither a devaluation nor Greek control of monetary policy necessarily fixes their economic woes). Additionally, richer countries like Germany and France would be absolved of the political and economic burden of bailouts. Best of all, the rest of us would be spared the incessant talk and rumor of an impending euro breakup.
But even these possible positives stemming from a euro breakup obscure some very real negatives. For one, even those arguing for it offer few details—and seemingly leave out benefits brought by the common currency (increased trade, capital flows and eliminated currency exchange costs to companies, to name a few). The true impact of a euro breakup is far more uncertain, and outcomes could range from largely uneventful to quite negative, contingent on how a potential dissolution occurs. Would eurozone officials simply push out the weaker countries like the PIIGS? Would there be an orderly, planned unwinding over time, with accommodative trade agreements and free capital flows? (Much less bad.) Or would it be a disorderly breakup? (Much, much more bad.)
Those questions are at the crux of the matter, but they may not even need to be answered. The EFSF has effectively bought time through 2013 for issues to be ironed out, mitigating risk of a dramatic unwinding near term. And over the past several months, European officials have gradually accepted reforms aiming to strengthen the monetary union—a permanent bailout fund set to launch post-EFSF, fiscal management overhauls, better oversight of member country economic policy and guidelines to improve the bloc’s competitiveness. ECB President Jean-Claude Trichet took it a step further Thursday, proposing deeper ties between euro-member countries, including a common European finance ministry to help shape countries’ economic policies and give the bloc a say on national budgets. That’s a far- reaching proposal, and it remains to be seen if it gains traction. (That said, Greece might argue it’s already in place for them—given the IMF, EU and ECB have significant sway over current austerity plans.)
Even if Trichet’s proposals don’t see the light of day (and they may not), a euro dissolution is neither inevitable nor a magic solution to extant problems in peripheral nations. Nor are we inherently pro-EMU or against. (And no one asked our opinion during the entirety of the period the union was being formed, oddly.) It is what it is—we just think capital markets fare better overall with less, sudden, region-wide monetary upheaval. That said, calling for euro dissolution now is not only untimely given the EFSF, it’s an incomplete thought that doesn’t represent a balanced analysis of pluses and minuses. The eurozone is far from flawless, but as the wise Mr. Berra also said, “If the world was perfect, it wouldn’t be.”
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.