The possible breakup of the eurozone is now openly discussed by policy officials and financial executives. The interest rate on Spanish government debt has soared above 7 per cent, reflecting its lack of progress in reducing its fiscal deficit and those of Valencia and other regional governments. Greece is likely to fail its inspection by the “troika”, bringing it closer to a eurozone exit by the autumn. Even Germany is under financial pressure because the Bundesbank has so much explicit and potential exposure to peripheral European countries.
The last eurozone summit ended with an optimistic communiqué but nothing of substance. Meanwhile, financial markets may already be in the process of forcing a solution upon Brussels policy makers. The declining value of the euro holds the key to the eurozone’s survival.
The euro has fallen in the past year by 15 per cent relative to the US dollar (from $1.44 to less than $1.21). If it falls an additional 15 per cent it would reach near parity with the dollar and would still be about 20 per cent above the euro’s historic low of 84 cents.
