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November 26, 2010 / Lukasz Cerazy

Does the Euro Have a Future?

Image: Pixomar / FreeDigitalPhotos.net

The peripheral countries in the Euro have been subject to speculative attacks by investors and capital markets, which is putting pressure on the monetary and economic union in Europe. This tension has put the future of the Euro in question and certain observers suggest that the existence of the Euro is in danger of collapsing. Greece felt pray to rising costs of lending 6 months ago, which resulted in the government not being able to service its rather large debt. To avoid a default like the one that hit Argentina approximately a decade ago the EU and IMF put together a bail-out in the form of a steady supply of very favourable lending conditions. Now Ireland has found itself in a similar position and received supports form the EU but capital markets have not responded well and remain sceptical. This has put the heat on countries in a similar fiscal position and resulted in medium term bond yields to rise on the Iberian Peninsula and in Greece. The EU has reacted by trying to cure the symptoms but is not seriously addressing the problem at the core of issue, which is institutional reforms and fiscal integration. This proposed reform did not receive much attention as long as things were going well, however, now that the members of the EU have reacted asymmetrically to the shock of the recent recession its initiation seem more pressing. The Euro has got a future but will depend of the willingness of its members to undertake reforms, otherwise, the Euro could fall apart and much of the integration could be reversed. Opinions on what the right thing to do are abundant and have much political sentiment, however, economically it is clear where different routs will lead.

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