Total costs would far exceed the benefits

The financial crisis now extends into real crisis is severely testing the cohesion of the euro area. Is this the end of the single currency

One can imagine two scenarios at the end of the euro: countries, one after the other, out of the monetary union to devalue their currency or the area as a whole through such difficulties, for example a series of shortcomings of its Member States, that it renounces the Monetary Union.

The first scenario of output to devalue is perhaps less relevant. There seems to be a consensus (recent) on the fact that none of the countries of the euro area has interest to come out of his own to devalue: costs should far exceed the benefits. The countries which have an economic interest out of the euro area are the countries with significant competitiveness structural problems, which resulted in high current deficits. The expected benefits are those from the possibility of devaluing the currency: renewed competitiveness, but temporary since it would not solve the structural problems. The costs would be three levels: economic, political and administrative. Economic: citizens offset. The cost of the public debt of the countries would increase. Policy: the country that left the euro zone can expect to see its influence reduced in the European Union and to a certain antagonism of its former partners. Administrative: all contracts (salaries, loans, taxes, etc.) should be rewritten in local currency. Total costs would far exceed the benefits.

If a scenario of withdrawal of the country appears to be set aside, the State of public finances in some countries of the zone awakened fears of scenario 2 the viability of monetary union. Finance of States are being hurt by the recession, increasing deficits and debt (on average), and by the crisis financial which led States to put in place guarantees to banks (on average 20 of GDP in most countries of the euro area). In addition, some countries had already before the crisis a large public debt, still increased by a deficit in their current balance, like for example the Spain, the Greece, or the Ireland including. Finally, some States have entered the crisis with a public debt already exceeds the 60 of GDP. Total financing of States needs heavily increased from 647 billion euros for the euro area in 2008 730 billion euros in 2009 (estimates Barclays Capital in December 2008).

Markets worry therefore higher public commitments and common financing needs in a context where the liquidity is rare. This results in risk premia increased and differentiated according to the country to the extent that the conditions of funding of the operation of some States appear more difficult.

Costs that would result from the failure of one of the countries of the euro area are twofold. On the one hand, experience shows that a default, with a banking crisis, causes a drop in business as most important that the balance sheets of the banks of the country contain many sovereign of this country borrowing what likely is the case for number of small countries in the euro area. Their lending capacity is drastically reduced. On the other hand, the risk of a domino effect on all of the countries of the eurozone in the fragile financial is not negligible, as shown by the various monetary crises in the period pré-euro, early 1990s (the pound sterling, the Portuguese escudo, the French franc, the Italian lira had been in turn speculative attacks). It is then all of the countries of the euro area that would be mauled, with higher debt costs and possibly a euro attacked. Such sequencing could revive fears about the viability of the single currency.