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General Articles

Is the euro going to break up?

 
Even if you spend your time relaxing in the Riviera, you can’t have failed to notice the speculation this week: Is Greece going to leave the euro? Is the euro going to break up?
 
Unfortunately, because newspapers are businesses and want to sell as many copies as possible, it’s quite difficult to get a balanced look at the topic. In this post then, I hope to do just that, and look at the future of the euro devoid of scaremongering. I hope it’s useful.
 
1. In Greece, life continues much as normal.
 
If you read the tabloids, you might have the impression that Greece has been taken over by a lunatic fringe, intent on exiting the euro to usher in the end of European civilisation. Certainly the endless images of riots cannot help in this regard (as if everywhere outside the UK were a wilderness.)
 
Yet if you hear from people actually based in Greece, you find that life continues much as elsewhere in the civilised west. Certainly, there is occasional violence, and the country is caught in the grip of a particularly terrible recession, but life goes on. Businesses conduct trade, tourists come and go.
 
2. Neither Greece nor the Eurozone wants the euro to break up.
 
In the present panic, it’s easy to forget that the vast majority of Greeks favour staying in the euro, while the Eurozone is unlikely to welcome the departure of a member state that can only damage it.
 
For instance, recent polls suggest Greek support for the euro has in fact gained since the last election, to 80.0% from 70.0%. This is not the will of a people eager to eject themselves from the European Union. Instead, it’s likely that the rising support of non-mainstream parties reflects frustration at their present economic circumstances. (It’s possible to reject the bailouts that have extended this suffering, while supporting the euro, after all.)
 
Similarly, given that Greece leaving would only extend speculation about the future of the euro, Eurozone politicians are unlikely to welcome it, regardless of what they imply otherwise to the press.
 
3. If Greece did leave, it’s unlikely the worst would happen.
 
Some economists put the possible cost of Greek exiting the euro at €1tn, and suggest it would effect banks in the Eurozone, UK and worldwide. On a worst-case scenario basis, this is probably true, and yet it ignores the fact that both governments and banks have had 2 years to prepare for the possibility of a Greek exit.
 
There is for instance the Eurozone firewall, totalling some €1tn, which can be used to support both countries and governments should Greece leave. In addition, ever since 2008, banks worldwide have been by law made to strengthen their balance sheets, exactly to avoid a second shock.
 
In other words, there is still an excellent chance Greece will remain in the euro, in which case all of this doomsday speculation will have been for nought. And even if Greece does leave, it’s not as though the world is unprepared. The chances of a repeat of 2008 are minimal.
 
Peter is a broker at foreign exchange broker Pure FX. To find out more about how you might be affected by a euro break up, get in touch at our website. We’d be delighted to provide an in-depth response to your query, free of charge.
Friday, 25 May 2012    Section: General Articles    Author: Peter Lavelle
Article tags: Euro Money Greece
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