It was only a few years ago that countries were falling over each other to try and gain entry into the prestigious ‘Euro club’.
Now, the picture is not so golden – we are faced with continuous riots in Athens, discontent from European voters and danger of default risk spreading.
The Greek people are clearly furious at how their national accounts were allowed to deteriorate so dismally. But the protests are too late; fiscal austerity is inevitable. The bailout-package, mainly funded by Germany, comes with strict conditions attached.
The voters of Germany are far from happy either. If the German people weren’t euro-sceptic before, then they may be now. Nationalist mourning for the Deutschmark did not take long to surface following the announcement of the bailout package.
In a recent meeting with Nicolas Sarkozy in Paris, David Cameron predictably distanced himself from the Euro. Who can blame him though? The Government already has one deficit crisis, it certainly doesn’t need to be part of another one.
Greece may just be the beginning though, other economies within the Euro Zone are also at risk of default. Collectively known, rather harshly, as the PIGS, Portugal, Ireland, Greece and Spain are all have deep deficits.
The bailout package offered to Greece may not be sufficient to stop the financial panic spreading towards the West of Europe. When it was announced markets reacted favourably worldwide, however, it seems that this was just a short rest-bite. The Euro members, in collaboration with the International Monetary Fund (IMF), may not have done enough to stem the virulent flow of trepidation.
Could the Euro Zone cope with four bankrupt states on its hands? Also, who would be paying for it all? Both are depressing and terrifyingly real questions.
Bailing out Greece also may have unintentionally increased the risk of default elsewhere. This is due to moral hazard it has created. Portugal and Spain may choose to keep the electorate happy and avoid Grecian-style rioting, rather than make savage cuts, safe in the knowledge a bailout is waiting for them should they crumble.
Despite the pessimism of Angela Merkel, the French seem fairly optimistic about the prospects of the Euro. Optimism seems quite misplaced in the current environment though.
The system of running a single currency through one central bank relies on synchronisation of economic conditions. However, fundamental differences are now bound to arise.
The Euro zone countries who are still a long way from recovery will want consistently low interest rates and the European Central Bank (ECB) may have to print money to cope with chronic leverage levels. This will clash with the other stronger nations who will want to prioritise curbing inflation.
Divergence is going to lead to future conflict within the Euro zone and create challenges that the Euro countries will not have experienced before.
Fun was often poked at the Euro zone for being dull and boring. Now it is definitely exciting, but unfortunately for all the wrong reasons. Whether the Euro can survive its biggest challenge is yet to be seen, but it certainly won’t be easy.