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Will the euro collapse and disappear tomorrow?

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There has been a continual debate about the euro and the future of Europe. When the UK voted to leave the EU in 2016, I was absolutely mortified. I didn’t think it would happen, but it has happened. It’s a messy divorce, but the divorce has taken place. Now, the debate moves on to the future of the euro. Introduced in the 1990s, we live with the euro as a currency with confidence and ease. Competing with the dollar and yuan, we accept that the euro is used across most of the Schengen region and it is a staple of commerce … or is it?

What if the euro collapsed and disappeared tomorrow?

In a Bloomberg article, Richard Cookson poses this question based upon what is happening in Italy. Italy is led by Mario Draghi, the former head of the European Central Bank (ECB), but its “bloated debt load may finally doom the experiment with Europe’s shared currency”.

The tension here has been building for a long time, but it’s basically the fact that Northern European nations are subsidising Southern European nations and they’ve had enough of it.

For context, I remember when Greece almost went under and after a lot of hard negotiations the ECB offered them a hand. At the time, someone said to me that Greece is the Florida of Europe. What does that mean? It’s the retirement and holiday home of the region. That’s how some view Greece (and Florida). We support them to ensure that our latter years and holidays are enjoyable, a bit like paying into a pension plan.

But the idea of breaking up the euro is far more radical. Why would this happen? Partly for the reasons above, but more importantly for the reasons going forward. Inflation rose by 5% in December, the highest in the history of the euro; all of the EU has an energy price issue, which is likely to push those inflationary pressures higher; and finally, all of the stimulus that the ECB introduced to get the EU through the pandemic needs to be terminated.

And then there is Italy.

“The biggest concern is Italy, both for its size (it has one of the largest government-bond markets in the world) and its debt dynamics. Under the toothless growth and stability pact, countries in the euro are required to try and cap their debt to 60% of GDP. All members have seen their ratios head sharply higher over the last couple of years, but Italy’s will have ballooned to about 155% of GDP this year, an increase of 50 percentage points since 2007.”

Richard concludes that a crisis in 2022 is unavoidable. A European crisis. What will it look like? How will it turn out? Who knows, but with Angela Merkel stepping down, an increasingly nationalistic rallying call from Emmanuel Macron and a UK that has exited, the future of Europe does look far more questionable than it did a few years ago.

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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