Tuesday, April 5, 2011

'One in seven' chance that nations will abandon euro

The risk is roughly one in seven that Europe's ongoing debt crisis will push member nations to abandon the shared currency, raising the spectre of the "effective end of the euro area," the Economist Intelligence Unit has warned.

Attempts to restore investors' confidence in debt-laden nations' ability to honour their commitments could see the weaker eurozone members grow ever wearier of the demands placed on them, according to a new report from the research body.

Meanwhile, those countries whose finances are in better shape could lose patience with propping up other member nations, in this worse case or "ultimate risk" scenario.

The pressure on politicians from voters at home to leave the shared currency could then become "irresistible", resulting in either stragglers like Portugal or Ireland or a robust economy such as Germany deciding to leave, before other members follow suit.

"This scenario posits that sooner or later, the cement that has held European countries together for decades cracks and the progression towards ever-closer union comes to a spectacular halt," said researchers, who gave it a likelihood of 15pc.

The report's central scenario - put at a 50pc probability - is that the eurozone will muddle through the crisis, with the most indebted countries accepting the harsh reforms needed to cut their deficits and stronger members reluctantly offering enough support to contain the crisis. (read more)