The End of the Road for the Eurozone
There are a number of countries in the European Union. To be precise 27 with another country Croatia ready to join on 1st July this year. Under this umbrella, a number of countries (17) have adopted the Eurozone (otherwise known as the Euro). The Maastricht treaty signed in 1991 was the start of the European dream; free flow of labour across borders, a common European citizenship and EU passport were introduced together with the provisions for the development of a common foreign and defence policy and the Social Chapter. However, the most important result of Maastricht was the single European currency, The Euro. One might wonder why Croatia would want to join the Eurozone at this stage. They should really look around to see what is happening in Greece, Cyprus, Portugal and Spain. Severe austerity measures high unemployment and hard earned savings being taken away from investors. Really Croatia, why would you want to join the Eurozone? With the full weight of the EU law to cope with, giving up the Kuna for the Euro does not sound like a realistic paradigm. I would argue that Eurozone dream is about to fade away. Would the paymasters let us this happen? Take for example the events in Greece where the IMF have imposed tough reform programs. What could possibly happen if Greece either decided to exit the Eurozone or was forced out? For a start this would commence contagion with Portugal, Ireland and Spain all being affected. Next, property prices could possibly fall. There would no confidence left in the Greek Banking system and this would crumble. A return to the barter era? It could happen. With the exit from the Eurozone, unemployment would then continue to rise, new currency laws would have to be passed and all contracts would have to be re-denominated in drachma. Border controls would have to be imposed and new currency printed. Does this sound like doomsday? It could be or it might be an opportunity to get out of the Eurozone which is riding high on the road to catastrophe. At a domestic level, if Greece should decide to exit the Eurozone, the drachma would depreciate (some argue by 15-20% against the Eurozone) making imports more expensive but providing greater opportunity to export. However investors may well want to take their capital out of the country. After all, who would want to invest in a country where the currency is being devalued? Although devaluing the drachma would provide the competitive edge against other countries, food prices would spiral as imports would become expensive. Greece imports a lot of basic every day essentials. Yet there is also the hope that with all the challenges faced by exiting the Eurozone the government would be able to restore the banking system but will have to watch out for hyperinflation. Either way, the risk stakes are high. The Eurozone may well have to prepare for the odds that countries such as Greece will default on their loans and that there will be unrest in the country with ongoing austerity measures. Political pressure may lead to contagion. The key is to manage expectations and confidence. The collapse of Lehman bank is an excellent example of no confidence. Should contagion take place, the effects will be far reaching across the world. Trading between the Eurozone and the rest of the world would be affected. With the economy in the Eurozone contracting, other countries in the world would have their exports cut leading to an unprecedented global recession.