It could be, at least according to Jack Straw’s comments in parliament today. Some say the Jack Straw is being careless with his comments however there are also many who share his views. So what is the situation and just how possible is the scenario of the Euro collapse?
The fundamental issue for the Euro, and in particular countries such as Greece, Ireland and Portugal, there is too much debt, there has been excessive spending and there needs to be a rebalancing. Austerity is going to be around for a few years yet!
The problem comes when the markets, who are providing the funds for the debts, start to move toward the position where they feel the debt cannot be repaid. When this happens the cost of debt soars to a point where the interest rate repayments cannot be met, and the only way out is restructuring the debt, in effect a debt write off.
The markets are extremely wary of debt write off, if the tipping point is reached then the markets will pull out or at least push interest rates for the debt upwards. This would be “unaffordable” for Greece, Ireland and Portugal.
But could the EU keep funding those countries in need? The reality is that the EU countries also need to borrow in the markets, and countries like Spain and Italy are also in a challenging situation for debt financing, if these where to be the next casualties the remaining EU countries would not have the resources to support them, and the EU would collapse.
Another option is to force Greece out of the Euro. Whilst this might give some temporary relief for the Euro it then raises the question of how safe is the Euro in any country. Will markets start to see some countries are a “safer” Euro investment than others? If this was to happen it would also be the end of the Euro.
So going back to Jack Straw’s comments, maybe he is saying what many feel is a real possibility, but they simply cannot say for fear of making that possibility a certainty.
