Euro – will be or won’t be?

Whole world is pondering (and not for the first time) after almost 14 years of its coming into being. Euro came into existence in Jan of 1998 and took physical form in Jan of 2002.  To jog down the memory lane,  four monetary and budgetary convergence criteria for the member countries are (a) price stability (inflation criteria),  (b) stable exchange rate (with other member countries), (c) Government finance (threshold on gross debt and budget deficit as a % of GDP) and (d) interest rate (treasury rate as an indicator).

The sovereign debt crisis that is gripping GIIPS (Greece, Italy, Ireland, Portugal and Spain) is nothing but budget deficits created by excessive spending or insufficient tax revenue or both. France and Germany have had several budget deficit (as a % of GDP) breaches and got their violations waived; but Greece is a big one and financial markets are living with this nightmare!  This has put Euro’s debt crisis in bold on the dashboard of all and sundry and the world can’t take its eyes off the action (or lack of it)!

The union by all means encouraged free flow of capital to surging economies and it was meant to be.  However this caused imbalances in spending and fiscal deficits.  If only the peripheral economies had managed to get their act together and pushed up exports or attracted more capital inflows, the intensity of pain today would be far less.  Who wants to bet on dwindling economies with ballooning deficit and very low or no growth?  It’s a vicious circle!

The biggest challenge is lack of takers for sovereign bonds of some of its member countries. There are stories (hopes. Speculation and denials) floating around everyday dragging asset markets up and down (more down than up).  Can EFSF (European Financial Stability Facility) do the trick?

EFSF is a special purpose vehicle financed by member countries to help the countries facing debt crisis and to preserve financial stability in Europe.   EFSF promises substantial resources and is pushing IMF to play a significant role is fighting the situation. There is still no one number for the total firepower of the fund.  Hope it doesn’t turn out to be too little too late.

So will the union survive?  German and French officials are firefighting to calm the markets. But the pictures remains gloomy - growth, debt and unemployment and it is contagious.  It is a tall order to get the economies of Euro Zone integrated considering their very different internal dynamics.  Are we close to the end of another era?  Or could we expect a pleasant Christmas gift from European Summit scheduled for Dec 9?

What happens to Euro? The recent independent analysis by OECD, it stated the obvious and dismissed Euro’s chance of ever rivaling Dollar as a reserve currency (as once claimed by its founders).  Strange are the ways of the world.

While Euro’s existence is being questioned yet again, it still doesn’t seem to reflect the real state of the economy.  I am tempted to short the Euros some more!