An Evaluation Of The Prospects For The Euro Currency In 2012-2013

Abstract

The 2008 global Financial Crisis and the subsequent relative collapse of the financial and economic markets, including the government bond markets, in Greece, Ireland, and Portugal as well as economic weakness in other Western European economies have called into question the viability, going forward, of the Euro Currency. The so called PIIGS countries of Portugal, Ireland, Italy, Greece, and Spain are thought to be financially vulnerable because of high levels of government spending and resulting deficit levels and inefficient labor markets and tax collection policies among other factors. Those five countries, along with the stronger economies of France and Germany, comprise 7 of the 17 countries in the Eurocurrency Union. Any weakness in the 5 country group can have a contagion effect on the rest and if the recent financial bailouts by the IMF and the European Central Bank in Greece, Portugal and Ireland are not effective then there is a real danger that one of more of the GIP (Greece, Ireland and Spain) countries may have to abandon or be forced to abandon the Euro. Because there is no provision for a country leaving the Eurocurrency Union this is uncharted territory and could lead to the weakening or even demise of the Euro depending upon circumstances. The fact that there are also significant financial linkages and related default risk connecting the five countries to the sounder economies of Germany and France increases the risks. This paper will evaluate the likelihood that the Eurocurrency will be substantially weakened or abandoned over the next 18 months. The evaluation will be highly dependent upon the forecasts for the 5 countries economic prospects, especially the very large economies of Italy and Spain as well as the likely responses of Germany and France to future default like events in the five countries. Metrics utilized will include the trend in economic indicators like long term government bond yields, deficit spending, tax collections, economic growth, and financial linkages and dependence among the seven countries. European Central Bank data and information from related sources like the IMF will be utilized.