Will the Euro prevail?

Global financial markets continue to tumble because of the weak economic situation in Greece. Many analysts fear that the financial unrest can easily affect other, mainly Southern European countries, that are supposed to have similar structural economic problems.

Together, these often junk rated countries are called the PIGS- nations; Portugal, Ireland, Greece and Spain. Meanwhile, economists, politicians and civilians in the predominantly conservative Northern part of Europe are discussing a new financial system for the continent. Some nations pursue the return of their own currency. Others strive to introduce a new currency exclusively for the formerly strong monetary countries, such as Germany, The Netherlands and Finland.

Reasons not to abandon the euro

Although these initiatives may sound rational at the moment, and may have the potential to take away some of the turmoil at the financial markets on the short term, on the long term the disadvantages will outweigh the temporarily advantages.

Transformation costs

First of all, because of the initial transformation costs. It will take billions of euros to reset all the numbers and figures into a new currency. Complex financial IT systems, websites and intranet, accounting mechanisms, invoices and all relations with domestic as well as international stakeholders will have to be changed. This operation will take an immense amount of time, energy and money for the involved parties. It will result in a significant and long lasting loss of efficiency.

Intra trade

Secondly, a split of the euro will considerably decrease in intra-European export and trade. Since the introduction of the euro, Northern European EU countries have witnessed a significant increase of their export to Southern European member states as a result of the different purchasing-parities of these two zones. Additionally, the absence of internal European trade- and currency barriers has led to an extensive increase of economic activity. Giving up the euro would strongly reduce this internal competitive advantage and force some parties to export to or from e.g. China. This would eventually result in a decrease of overall European prosperity.

Image

Finally, giving up the euro would cause severe image damage across the world. Not only would a euro breakup lead to a financial hurricane, the other part of the globe will lose a lot of confidence in the second currency of the world. Investors would flee to other safe-havens like for example the U.S. dollar or to China. Foreign Direct Investment in Europe is likely to plummet, and the costs of image-loss are too big to calculate.

Switzerland case

There is also the possibility that only one or two countries will exit the euro-union and strive to become ‘the new Switzerland’. However, it is of the utmost importance to realize that Switzerland is not as focused on export as e.g. The Netherlands or Germany. Switzerland is also not so dependent on its mainports as for example The Netherlands are on Amsterdam Airport and the harbor of Rotterdam, global mainports which are of vital importance to the country’s economy.

In addition, there can only be one or two Switzerland’s. If more nations become neutral, the specific Swiss advantages of neutrality will be eroded. Finally, nobody knows what the current state of the Swiss economy with the euro would have been. Maybe Switzerland would have been ever better of than it already is.

Future

Concluding, it can be stated that despite all the current financial turbulence, the euro is of vital importance to the European mainland. Abandoning the euro, even partially, will result in significant losses and these will, by far, outweigh the eventual benefits. Europe needs to enforce a tighter control on its euro -member states in order to prevent new Greek tragedies and ensure future prosperity.

(c) GLOCONOMY 2010