Fears grow for the future of the single currency

AS the EU is left to confront the possibility of the break-up of the single currency, Dutch bank ING recently presented a chilling account of what the fallout might be for the 16 member states who signed up for the euro, now in its 11th year.

Fears are mounting that the pressure on the currency could prove too much as the bailouts of Greece and Ireland fail to appease the markets now targeting Portugal, with Spain, France and Belgium also in their sights.

Fear is starting to stalk the holders of the currency with reports emerging of German citizens piling up their German designated euro notes, just in case.

Economists at ING produced one of the first financial models some months ago of what might happen if the single currency fell apart during 2010.

They called it Quantifying the unthinkable and stressed it was not a prediction of the end.

It said that in 2012, the first year of the full reversal to national currencies, output would fall between 5% and 9% across various member states, while the reformed national currencies would fall by a massive 50% if a bust-up happens.

The 16 countries which opted for the euro now would have to get their central banks to restart their printing presses.

In ING’s view, this break-up would be far greater than the crippling crisis caused by the collapse of Lehman Brothers back in 2008.

Until recently the notion that the euro might cease to exist was unthinkable.

Eurozone leaders continue to dismiss any risk to the currency after financial markets, alarmed by Ireland’s debt bailout, turn up the pressure on Portugal and Spain.

German ChancellorAngela Merkel, inresponse to the growing threats posed by the debts of weaker member states to the currency, said last week she was confident the euro area would emerge stronger from the crisis.

The chairman of eurozone finance ministers, Jean-Claude Juncker, said he was not worried about the survival of the euro, but was concerned that “in Germany, the federal and local authorities are slowly losing sight of the common European good.”

Klaus Regling, chief of the European Financial Stability Facility (EFSF), told the German daily paper Bild: “There is zero danger. It is inconceivable that the euro fails.”

Germans are getting fed up of bailing out the rest of Europe and would be happy to have the good solid German mark back in their pockets.

The ECB does not issue euro bonds, which would have avoided individual countries being picked off by the markets one at a time. It failed to take into account that weaker economies like Ireland simply could not live with the interest rate regime dictated by the German central bank.

In London this week, a report called Can the Eurozone really break up?, published by Capital Economics, the London-based research group, which was written by Jennifer McKeown, answered “Yes” to that question.

McKeown wrote: “The eye-watering fiscal consolidation and competitive adjustment that many economies face over the medium term in order to stay in the euro” is providing the basis for the mounting scepticism that the days of the euro are numbered.

In Dublin yesterday Peter Brown, managing director of the Irish Institute of Financial Trading, is sceptical about how the ECB will and is coping with the pressures. He believes the bailouts are just a holding exercise and that, in time, some counties will default.

“There is a very very serious debate going on in Germany right now that will involve them looking at an ‘exit mechanism’, he said.

It is a process that will take a lot of time to resolve, he said, with no certainty as to the outcome.