Dominic White, European economist at Absolute Strategy Research, a London advisory firm, doesn’t expect the conflict between “short-termism” of the financial markets and the gradual approach favored by politicians to be resolved any time soon.
“Given that Germany is leading the political response, that tells us there is very low likelihood of seeing a ‘big bang’ type resolution of the crisis,” he said.
Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm, sees the conflict as a battle between market participants’ desire for an immediate backstop for government debt and Berlin’s insistence that help be accompanied by austerity and stronger fiscal rules.
“Bridging the gap between these two distinct views of the crisis — conditionality versus unconditional support — will be a slow, painful and politically fraught process,” he said.
Neither Spiro nor White expect the euro to splinter.
There are plenty of observers who do. And many analysts who don’t expect a breakup acknowledge that the risk of one or more countries exiting European economic and monetary union have risen.
Capital Economics has long maintained a euro-zone breakup is the likely end result of the crisis. They see Greece likely leaving the euro-zone next year, potentially followed by other members in 2013.
That’s partly because policy makers may not be able to outrun the markets.
It’s unlikely that treaty changes or the eventual introduction of euro-zone bonds can be implemented quickly enough to prevent an escalation of the crisis,” argued John Higgins, market economist at Capital Economics, in a recent research note, adding that such measures fail to address the underlying fundamental causes of the euro-zone’s debt woes.
“If we’re right, then any optimism could soon give way to pessimism, putting renewed pressure on euro-zone government bonds and more pressure on the euro as investors took fright once again from the prospect of a break-up of EMU,” he said.
Historians may look back at 2011 as the year that the unthinkable became thinkable.
While a few economists warned in 2010 that the crisis could eventually sink the euro, it was the acceleration of the crisis and the repeated failure of European leaders to get a grip on the situation that pushed the idea of a euro breakup toward the mainstream.
Investment houses worked out the potential costs of breaking up the euro (it would be very expensive for everyone involved). Some businesses began making plans for a split, while clearing house operators made dry runs to ensure their systems could handle the re-emergence of national currencies or other contingencies.
