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Prospects for the Euro

As reported by various news channels, European leaders have reached a deal to provide aid to Greece in order to help overcome its debt crisis. So what are the prospects that the Eurozone will return to a path towards recovery?

This is an oversimplification of things but hopefully it illustrates one of the core issues within the Eurozone:  The EU sort of "put the cart in front of the horse" by embarking on a common currency prior to common fiscal, monetary and legal environment among the member states.  It is particularly evident in the current PIIGS (Portugal, Italy, Ireland, Greece & Spain) crisis that the common currency has taken away a natural escape valve, i.e. individual country currency, to deal with an individual country's debt or other economic problem.

The net effect is currently a weaker Euro which may actually be one of the desired outcomes enabling the more export-driven economic powerhouses in Europe to tackle an ongoing recession.  For instance, Germany’s GDP dropped 5% in 2009 and in view of the PIIGS debt concerns, a weaker Euro may give some room for  the center of Europe (France and Germany) to grow exports enough so as to better absorb some of the fall-out from sovereign debt concerns. 

A potential default by any of the PIIGS countries would have a devastating effect on Europe’s economy and on the Euro. But Greece’s potential default may the easiest one to absorb within the European Union.  There are yet more countries with much higher perceived risk of default and possibly more devastating effect on the Euro.  I'm afraid until individual countries get their economic house in order, a common fiscal policy may be increasingly difficult to implement. 

One possible scenario I can think of would be a two-tiered approach towards common policies among all member states.  Similar to the approach of using a Monetary Union within the European Union. Several EU member states, most notably the UK, have opted not to join monetary Union for the very reasons that are currently making life more difficult for the member states and equally so for the European Central in terms of steering through the crisis. 

A two-tiered approach might give birth to Euro 2.0 a new and higher rated core currency similar to an A-share of a company's stock.  The core countries would have a fast-track route towards a common fiscal and economic policy as well as a uniform legal framework. 

The B-share might then include countries with less rigid economic policies and obviously much higher interest rates and financing costs and a longer route towards entering overall common laws and policies.

Incidentally, the core countries appear to be located in the center of Europe whereas the B-share Eurozone countries were located among its geographic outliers. The EU and the Eurozone countries are certainly facing an interesting dilemma which is not swept away by the quasi bail-out of Greece.  There are many other problems lurking beneath the surface. 

For those of us who have a vested interest in the future and longevity of the EU and the Euro, let us hope that the rigidity and the constraints imposed by the overall EU framework will not be its downfall.  Instead, the constraints might be the catalyst for an innovative approach; as often when faced with a sheer insurmountable problem, a visionary and innovator will look at this problem as an opportunity.  How about asking Steve Jobs to come up with the framework for Euro 2.0?

Disclosure: No stocks mentioned