Wednesday, July 14, 2010

Euro Zone Future?

What will happen to the euro zone, will it survive in its current form?

Some economists warned us about the drawbacks of having a european singe currency prior to its formation. Today it seems as if the euro zone dose not benefit any of the extremes. Greece could benefit and make its austerity program easier if it could devalue its currency. Germany, being the most credit worthy nation, will suffer the burden of a federal fiscal mechanism to protect other euro nations.

On the other hand, the cost of a single country doping out is extremely high. If a periphery country drops out, depositors will expect a devaluation and trigger a bank run. Fear wound spreed to other EU members with weak governments. This in turn will cause the core's banking system to also suffer as they own large amounts of the periphery's debt. Eventually this could cause a deep European rescission and given the importance of European banks globally the world economy would also suffer a setback.

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