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Eurozone on Verge of Break Up

Eurozone on Verge of Break UpEurozone on Verge of Break Up

The eurozone is likely to break up no matter how hard France and Germany try to save it, one of the world’s biggest investment banks is warning.

A senior employee at Bank of America Merrill Lynch says the single currency bloc has been gradually falling apart ever since it was formed almost 20 years ago, Reuters reported.

Although several countries including Greece and Portugal received emergency bailouts during the financial crisis, richer countries like Germany have failed to redistribute wealth on a permanent basis to poorer countries in the eurozone.

London-based Athanasios Vamvakidis, who worked for the International Monetary Fund for 13 years before joining the US bank, said this has driven members apart and increased inequality.

Although that changed briefly during the global financial crisis, he said "divergence seems to be the norm since the eurozone was formed".

Describing that as a "red flag for the sustainability of the eurozone", he warned poorer countries may decide to break away from the bloc as they fall further into debt.

He said: "Wouldn’t such countries want to have their own monetary policy at some point? Wouldn’t populism find the common currency to be an easy target–which is already happening in some countries?"

He added: "Without growth, debt could prove unsustainable in some countries and populism against the eurozone could find support in some cases, leading to exit of a country left behind. The probability that a country, at the core or the periphery, may decide to leave under a populist leadership at some point in the future is not low, in our view."

Emmanuel Macron, France’s pro-Brussels president, has proposed sweeping reforms to safeguard the single currency bloc, including introducing a new common budget.

Macron has repeatedly made it clear that he wants the eurozone to look more like a traditional currency area, with a central budget, finance minister and perhaps even bonds.

Eurobonds have previously been anathema to the Germans–but this month Chancellor Angela Merkel made comments about opening the door to a central budget.

This is important for two reasons: firstly, it is a big step in itself; secondly a logical consequence of a central budget is centrally-issued bonds (eurobonds), as it would be politically easier to raise money this way than from contributions from each country’s finance ministries.

Germany, which would have to finance a disproportionate amount of the extra spending, has reacted cautiously to the proposals.

But Vamvakidis said a wealthier country may also decide to quit because transferring wealth to poorer countries may not be "politically feasible".

He added that "even in an ideal scenario", in which these reforms were introduced, the "eurozone could still be at risk if the lack of convergence continues".

The prognosis echoes that of former Bank of England governor Lord Mervyn King who said the "one-size-fits-all currency" was doomed.

 

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