Wednesday, July 25, 2012

History suggests euro's obituaries are premature

by Alan Wheatley


July 25, 2012

As talk persists that cash-strapped Greece might have to exit the euro, and bond markets panic over Spain, the fate of Europe's single currency could soon be hanging in the balance again.

After "Grexit" and "Spanic", is it finally time to get ready for "Eurover"?

The euro certainly seems in danger of market-driven disintegration, as signaled by wildly divergent borrowing costs among the nations sharing the currency. Bond yields in Spain are at euro-era highs because investor confidence has evaporated, while yields on two-year German notes and 12-month Dutch bills are negative.

Ever-greater economic divergence is assured, scaring investors still further.

But if the currency does break up, it will be for want of political will, not for want of policy solutions.

"Is there some point at which the integrity of the region is sufficiently undermined that we pass the point of no return?" asked David Mackie, an economist with J.P Morgan in London.

"I don't see that happening in a technical sense, because anything happening in the capital markets at the moment can easily be reversed," Mackie added. "The break-up of the monetary union is not something that can ever be forced by financial markets."


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