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09/12/2012

What's Going to Happen to the Euro?


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The Eurozone has changed; it’s very apparent. In the last year or so, the playing field has been tipped with mountainous debt problems that Greece, and now Spain and Italy, are experiencing. Of course, all of Europe will experience a huge knock-on effect from the problems in Greece and Spain—but the question is, by how much? If the Euro fails, will all hell break loose? This article outlines some of the possible outcomes of the current Euro crisis.

THE BREAK UP

One outcome is that the Eurozone will finally bite the bullet and sink the Euro once and for all. This would surely be admitting defeat, as the leaders of Europe would have failed to provide a solution that would save the Euro. Ireland and Southern Europe would no doubt place a referendum to this solution, as they would probably think they are being brushed over and that the Northern Europeans are giving up on them. However, the Northern Europeans as a whole may feel irked by the cheeky Southern Europeans, who in taking their tax money have failed to provide stable economies owing to their laziness and overspending. This could result in a ‘controlled divorce’ of the Eurozone, even splitting it into two currencies. Putting this plan in place would indeed spark much controversy, indefinitely splitting Europe into the ‘poor side' and the 'rich side’.

THE BEST POSSIBLE OUTCOME

The best possible outcome would be if everything set out by European leaders actually went to plan successfully. Obviously, countries in the South of Europe won’t be as pleased with this plan, for they have to deal with tax increases, spending cuts, wage freezes, and recession; but in Germany and France’s defense—they have to deal with the mess that they created. This in turn would hopefully bring about an increase in European confidence, which would ultimately have a positive knock-on effect with trading, lending, investing, etc. This would be a slow and grueling process for Europe, but with a light at the end of the tunnel.

THE EUROPEAN FEDERATION

A union would be made that brings the countries of Europe closer to each other in political matrimony. A government, which has been elected democratically, would be created in Brussels—and would have the power to borrow, spend, and finance investment wherever it sees fit. Countries that have not signed up for the Euro currency would be asked to leave, and forced to join less powerful trading areas.

THE ULTIMATE DEPRESSION

This would be the price that we pay for holding the Eurozone together by the skin of our teeth. It would mean all the plans that have been put in place would be stuck to: tax hikes, pay freezes, spending cuts, and so on. This of course would result in a terrible recession—which in turn would lower European interest levels even more. As a result of this, the European Central Bank would slash its rates to an absolute zero—but this would work to little effect. A recession makes it harder for debts to be paid back which causes all kinds of trouble for the banks, which may eventually go bust alike other businesses. All in all, this is not a good outcome.

THE WORST POSSIBLE SCENARIO

This is known as ‘meltdown’; which Russia experienced a couple of decades ago. The financial markets would realize that Europe’s problems cannot be solved; that the strict plans set out in Brussels are just not viable. The Euro collapses, and banks stop lending to the majority of Europe (Germany may be exempt from this). Ultimately banks and businesses would collapse and governments would run out of cash, while the stock market would take an almighty plummet.

–IronFX

"What's Going to Happen to the Euro?" was brought to you by IronFX who specializes in Forex Training.


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